G20 is set to bring the world’s banks back into line

Leaders of the G20 group of developed nations were today putting the final touches on proposals to bring in strict new regulations for the world's banking industry to be thrashed out at this week's political summit in Pittsburgh.

Analysts say that plans to force banks to hold more capital as a cushion against losses and curb the amount of leverage they use to make their financial bets will hit profits and share prices in the banking sector.

"Regulation will make banks less profitable by increasing the cost of doing business," said Andrew Clare, a professor at Cass Business School in London.

The world's leaders will converge on the United States city for their meetings on Thursday and Friday amid huge pressure from their electorates to come up with concrete actions against the banks, which are seen as the root cause of the global recession.

Charles Goodhart, who is a former member of the Bank of England's monetary policy committee and now a professor at the London School of Economics, said: "Banks will have to raise more capital by issuing more equity, so existing stocks will go down."

JPMorgan Chase analyst Kian Abouhossein calculated earlier this month that the expected crackdown could lower investment banking profitability at Barclays, Goldman Sachs and Deutsche Bank by a third.

Others point out that the banks have already cut their leverage. They have done this by selling new shares to raise cash and setting aside liquid assets.