When EU leaders meet in Brussels on Sunday they will discuss a five-point plan for stability and growth put forward last week by President Barroso. The plan includes recapitalising banks through temporarily higher capital requirements, backed by restrictions on bonuses and dividends and the threat of nationalisation.
This is a good step towards making banks safer and less dependent on taxpayers, but with bank share prices on the floor there is a serious risk that banks will cut lending even more to reach their new capital targets. In fact, some are already doing so. This poses a major threat to the economy, as many European small businesses have no alternative to bank lending to finance themselves.
Finance Watch has therefore called for bank supervisors including the European Banking Authority to make sure that big banks cut their substantial trading assets before they cut the supply of credit to the real economy.
9 December 2011: UPDATE: The European Banking Authority yesterday released further details of its recapitalisation strategy for European banks, including recommendations not to restrict lending to the real economy, to allow certain transfers of assets to third parties, to restrict risk-weight optimisation and to require new capital to come first from private sources and retained earnings.
Thierry Philipponnat, Secretary General of Finance Watch, made the following comments:
“The supervision of bank deleveraging is critical to protect society from the potentially harmful consequences of bank under-capitalisation in the current sovereign debt crisis environment.
“EBA’s recommendations will help to protect the economy and jobs at a time when many banks seem to be more focused on their own needs than those of the economies on which they ultimately depend.
“The present regulatory framework exacerbates this by incentivising banks to deprioritise activities such as export credit and small business lending because they are deemed riskier than other types of assets, creating a credit bias in the economy against activities that account for a high proportion of growth and employment. In a downturn, this is particularly harmful.
“The immediate task for Supervisors is to ensure that decisions about which assets to reduce are made with the economy in mind, not capital incentives. For example, supervisors should take full advantage of the fact that many banks’ balance sheets leave room for deleveraging in their trading and derivatives portfolios.”