Goldman Sachs executive foreshadows next financial crisis
The second most senior Goldman Sachs executive has warned the world risks sowing the seeds of the next financial crisis through regulation aimed at making banks safer.
Gary Cohn, the global chief operating officer of the Wall St bank, today highlighted the risks of rules forcing banks to hold larger capital buffers so they can absorb bigger losses.
Speaking in Sydney, Mr Cohn said that in forcing banks to hold more capital,
regulators risked encouraging the unregulated "shadow" banking sector, so it became the next problem.
Tougher capital rules were also holding back jobs growth by choking off lending, and restricting banks' ability to trade in financial markets, he said.
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"If we continue to live in a world where safety and soundness and inflappability of banks trumps everything else, trumps economic growth, and trumps liquidity you are going to continue to see shadow banks grow bigger and bigger until of course maybe shadow banks become the next problem or until liquidity becomes the next crisis," Mr Cohn said.
"We're almost, in essence, foreshadowing the next crisis. The next crisis is likely to be one of three things that we're foreshadowing by what we are doing to banks.
"It'll either be a lack of economic growth and job creation, it's going to be a shadow banking crisis or it's going to be a liquidity crisis."
Mr Cohn, seen as a potential next global boss of Goldman, said rule changes had already caused Europe's market to shift "dramatically."
While the continent had previously been dominated by bank lending, he said it had become a "bifurcated" market where lenders relied on the capital markets if they were strong enough, or shadow banks if not.
He also higher capital hurdles had dragged down liquidity in markets for corporate bonds and shares to "quite shocking" levels.
The consequences of financial regulation is set to be a key topic of discussion at this weekend's meeting of G20 finance ministers and central bankers, in Sydney.
While Mr Cohn's comments were focused on the global economy, big Australian banks lobby for capital rules to be watered down through the government's financial system inquiry.
The Commonwealth Bank last week highlighted the trade off between greater stability and economic growth, saying it should be examined by the inquiry, led by former CBA chief David Murray.
The chairman of the Australian Prudential Regulation Authority, John Laker, dismissed calls for lighter capital rules, saying the local banks clearly had few problems accessing capital.
"Our major banks argue that they... face difficulties in explaining their financial strength to international investors. At first blush it's hard to reconcile this concern with the recent stellar performance of our major banks," Dr Laker said on Thursday.
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