As regulators around the world debate potential reforms for the banking system, Royal Bank of Canada's (NYSE:RY) chief executive is asking them to avoid the “piling on effect.”
In a speech to the Canada-U.K. Chamber of Commerce in London on Monday, Gordon Nixon said he’s worried that policy makers in a variety of countries might impose their own specific requirements on banks when it comes to things like higher capital levels.
“Higher minimum levels of both Tier 1 capital and tangible common equity should be mandatory, but the levels should be standard, straightforward, and reflect the appropriate risk-reward of the business,” he said.
He asked regulators to keep a few other things in mind, including the link between the profitability of banks and the availability of credit.
“We must remember that for the financial industry to maintain its market confidence and credit ratings it must be able to generate reasonable returns,” he said. “The cost of higher equity levels and inefficient regulation will ultimately be passed on in the form of higher credit cost and it is, therefore, important to ensure that regulation doesn’t overreact and choke off economic growth.”
Implementing reforms that have not been properly thought through could risk the financial system itself, he said, adding that standards need to be harmonized throughout the G20.
Mr. Nixon also made some specific recommendations, most notably calling on regulators to cap the amount of leverage a bank can have relative to its equity. “Capital formulas on their own did not work last time, so why should they next time?”