Global leaders meet this week seeking to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of banks from Goldman Sachs Group Inc. to Barclays PLC.
President Obama and his Group of 20 counterparts convene in Pittsburgh Thursday and Friday to cement a plan to force banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded. Restraining bankers' pay and narrowing imbalances in trade and savings will also feature on the agenda as officials try to hammer out an accord to prevent a repeat of the worst crisis since the Great Depression and ensure a sustained recovery.
By limiting the scope of banks to invest and trade, governments may check this year's 22% gain in the Standard & Poor's 500 Financial Index.
That may be a price they're willing to pay to prevent a repeat of the risk taking that sparked the collapse of Lehman Brothers Holdings Inc. a year ago, a worldwide recession and taxpayer-funded bank rescues.
"Regulation will make banks less profitable by increasing the cost of doing business," said Andrew Clare, a professor at Cass Business School in London and a former Bank of England official.
The summit, which will also be attended by U.K. Prime Minister Gordon Brown, French President Nicolas Sarkozy and Chinese President Hu Jintao, will also debate how to drive the economic recovery, avoid protectionism, improve accountancy and revamp governance of the International Monetary Fund.
The officials will also try to devise a framework to generate a more balanced world economy through greater U.S. savings, European investment and Chinese domestic demand.
Leaders travel to Pittsburgh amid voter disquiet after governments used public money to bail out banks only to see many of them quickly return to profit and resume setting aside billions for bonuses.
A Gallup poll in June showed that 59% of Americans wanted action to curb executive pay.
Under consideration: forcing banks to augment their capital buffers to better account for risk, retain more earnings and satisfy a leverage ratio, which measures equity as a proportion of total holdings. They may also consider a proposal to tie pay to capital levels from Financial Stability Board Chairman Mario Draghi.
The crackdown could lower profitability by a third at Goldman, Barclays and Deutsche Bank AG's investment bank, JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a Sept. 9 report.
Deutsche Bank's return on equity will probably tumble the most among the world's largest investment banks, falling to 6.7% in 2011 from 10% this year, the analysts said. Goldman's return on equity would decline by 4.4 percentage points and Barclays' by 4.3 points.
"The amendments to capital requirements will clearly affect the activities of banks in their trading books and securitizations," said Alessandra Mongiardino, a London-based analyst at Moody's Investors Service.
Spokespeople for Goldman, Deutsche Bank and Barclays declined to comment.