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Bankers warn Basel III leading to credit crunch

08 June 2012, 10:11 CET
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(COPENHAGEN) - Top bankers warned Thursday that problems raising fresh capital were pushing European banks to cut back on lending so as to meet tough new regulations and urged a delay in putting them into force.

"De-leveraging in many European financial entities and the European economy at large has gone too far," said Charles Dallara, director general of the bank lobby Institute of International Finance.

Under pending international Basel III rules and European directives, banks must significantly increase their capital-to-assets ratios to strengthen their ability to withstand future financial crises.

He noted that these rules were being implemented "at a time when access to capital for many European financial institutions is simply not there."

Instead banks are de-leveraging, or selling off assets or cutting back on lending, to improve their capital ratios and in the process, dampening economic growth.

"The scale of this deleveraging has been significant," said IIF president Douglas Flint.

"It is contributing in many markets to inevitable reduction in bank lending," an unwelcome result of regulations meant to strengthen economies.

Therefore, it is "perhaps an opportune moment to consider whether there should be a pause," he added.

The EU banking regulator requires major banks to raise core tier one capital ratios to 9.0 percent by the end of this month, considerably faster than under Basel III rules which are to be phased in beginning next year.

The chief executive of French bank Societe Generale, Frederic Oudea, said it was hard for bank to raise capital "in this current environment when there is fear around Europe but more generally speaking, with all the uncertainty which surrounds the future business models of banks."

He said that in the eurozone, the de-leveraging was hitting new lending as it was difficult to sell assets in the current situation.

"It might be more difficult to expect growth coming from an acceleration of credit in the economy," he noted, as markets have looked to central banks to jump-start a stalled recovery by lowering interest rates and pumping up liquidity.

Regulatory Capital - Legislation in force (CRD I, CRD II and CRD III packages) - New proposals (CRD IV package)

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