Higher capital requirements that international regulators plan to impose on banks worldwide are likely to push firms to shrink trading activities in favor of lending, Comptroller of the Currency John Dugan said.
The new rules being negotiated by regulators on the Basel Committee on Banking Supervision would have a greater effect on the firms' so-called trading books, which include stocks, bonds and other securities, Dugan said in an interview. Loans and other debt held until maturity on their banking books would be less affected.
Banks worldwide have opposed the proposed changes by arguing that they would force lending cuts because capital could not be raised in order to comply.
"One way to comply is shrinking your balance sheet, but it matters how you do so," said Dugan, who is leaving the OCC this month when his five-year term ends. "Many argue that it was the trading book that caused unanticipated losses during the crisis. To the extent that some bank shrinks those activities instead of bearing the increased capital charge, that may not be the worst thing in the world."