Global regulators should agree on the broad outlines of banking reform by the end of the year, but then give financial institutions ample time to adjust to the new rules to avoid stifling economic growth, said Stephen Green, chairman of HSBC and a prominent industry group.

“There is no question of banks dragging their heels. It is in no one’s interest to operate in an environment that is fragile or undercapitalised,” said Mr Green, who heads the capital committee of the Institute of International Finance, an industry group representing 390 banks and insurance groups. “We need to get clarity about this by the end of the year.” Mr Green’s comments are part of the debate over a package of reforms proposed by the Basel Committee on Banking Supervision and due for a vote in November. Aimed at averting another financial crisis, the wide-ranging proposals include tighter definitions of tier one capital, the first global liquidity rules and caps on overall borrowing.

The Group of 20 nations has asked the committee to formulate rules by the end of the year with an eye to implementing them by the end of 2012, but Mr Green said that date, or even a two-year extension, “might not be enough”.

He said: “If banks don’t have enough capital [to meet the new rules] …they cut assets. We are kidding ourselves if we think they are only going to cut trading desks and activities that some people say are socially useless. There will be real impacts on real businesses.” Mr Green’s call for phasing in the new rules may well find sympathetic ears.

Nout Wellink, chairman of the Basel committee, said he would not object to a slow implementation schedule.

Mr Green expressed reservations over another Basel proposal to impose so-called counter-cyclical capital buffers– which in effect force banks to build up an additional layer of capital when times are good that they can tap into when they fall short of funds. He said the danger was that banks would set the capital aside but would not be able to use it when they needed to.

“The risk is obvious – [the buffer] is put on but never released in times of stress, so it isn’t really counter-cyclical but simply an incremental layer of capital,” he said.

Mr Green felt that rather than easing the flow of credit in the bad times, this strategy risked “cramping the style” of institutions as they as sought to lend into recovery economy.

However, he acknowledged there was a need for authorities to be able to control the flow of credit to individuals and businesses through the economic cycle.

Other ways of doing this could be to impose caps on the amount banks can lend as a proportion of the property value or to make them take additional insurance when lending at high loan-to-values.

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