Bank lobby losing the battle over reform

WASHINGTON -- For those who think the bank lobby is all powerful, there's reason to cheer: The bankers are having a terrible time convincing anyone in power that financial reform is hurting the economy.

The Institute of International Finance, which represents 450 global banks and insurance companies, said last year that the Group of 20's regulatory agenda was so onerous that it risked shrinking gross domestic product in major economies by three percentage points in 2015.

If that warning was supposed to shock regulators, it failed.

Separate assessments by the Basel Committee on Banking Supervision and the OECD found the economic impact would be much smaller. And now a new staff paper from the International Monetary Fund takes a similar view.

Andre Oliveira Santos, a senior economist with the IMF, and Douglas Elliot, a fellow at the Brookings Institution in Washington, find that stricter regulations likely will increase lending rates by 0.28 percentage points in the U.S., less than 0.20 in Europe and 0.08 in Japan.

That's not going to strangle economic growth. Since central banks typically adjust their benchmark rates in quarter-percentage-point increments, Messrs. Oliveira Santos and Elliot's conclusions suggest the economic damage of the overhaul of financial regulation will be the equivalent of an interest rate increase by the Federal Reserve.

An important difference between the IMF paper and the others is the baseline for comparison. Unlike previous efforts, Messrs. Oliveira Santos and Elliot assume market pressures would have forced banks to hold more reserve capital, regardless of any new regulatory demands. They also assume that banks will reduce internal costs rather than simply pass on the full impact of regulatory changes in the form of higher interest rates. To do otherwise would risk losing customers.

"Higher costs for banks and other credit providers clearly will affect credit pricing and availability, but not via a direct 100 per cent pass-through," Messrs. Oliveira Santos and Elliot write.

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