FRANKFURT (MNI) – European Central Bank Governing Council members
have assured that stricter capital requirements for banks under the new
Basel III accord will not undermine the slowing Eurozone recovery.
Still, tougher rules will pose a major challenge for the Eurozone’s
ailing banking system, whose problems remain the ECB’s biggest headache.
Following the decision of central bankers and heads of supervision
from the 27 member countries to more than triple banks’ required core
tier 1 capital ratios to 7% by 2019, ECB President Jean-Claude Trichet
said that “the transition arrangements will enable banks to meet the new
standards while supporting the economic recovery.”
Other ECB Governing Council members, including Mario Draghi, Erkki
Liikanen and Miguel Angel Fernandez Ordonez, also said tougher capital
rules will not undermine the recovery, given the protracted phase-in
It is “a strong agreement which, in making the system more
resilient, will ensure a sustained recovery,” said Draghi, who also
heads the Financial Stability Board.
The assurances appear all the more important as the latest Eurozone
economic data have surprised on the downside, confirming expectations of
a slowing recovery. Industrial production stagnated in July. As a
result, the annual gain slowed to 7.1%, the smallest rise since
ZEW’s barometer for the future of the Eurozone’s largest economy
also disappointed in September. ZEW indicator of economic sentiment in
Germany plunged 18.3 points to -4.3, its lowest level since February and
57.3 points below the recent peak in April. The index fell more sharply
than even the most pessimistic forecasters had imagined.
While these data should still be in line with the ECB’s base
scenario and Monday’s European Commission forecast for 0.5% GDP growth
in 3Q slowing to 0.3% in 4Q, they will no doubt add to concerns over the
economic developments in a cooling global economic environment.
And private bankers continue to warn that new Basel rules will
weaken banks’ ability to lend and might thereby hamper the recovery of
the real economy.
New rules “will have consequences on the volume and cost of
lending and therefore a cost on our economy too,” European Banking
Federation Secretary General Guido Ravoet warned. He also said that the
tougher rules could put European’s ability to access credit at a
disadvantage as in Europe 75% of the lending to the private sector is
carried out by banks, against only 25% in the US.
Perhaps more importantly, new regulation also poses a significant
challenge to the ailing European banking system.
Achieving the new capital standards will require “hundreds of
billions,” estimated Governing Council member Nout Wellink, who heads
the Basel Committee on Banking Supervision. “I hesitate a bit to mention
numbers because it concerns a very long phase-in period that will take
about eight years and numbers will change over time.”
Raising fresh capital will be particularly hard for banks in the
periphery that, according to data released Tuesday, remain very much
dependent on the ECB for cash and have held up the central bank’s exit
from non-conventional support measures.
Overall borrowing from Greece, Ireland, Portugal and Spain fell by
E15 billion in August but continued to rise as a share of overall
Eurosystem lending to around 60% — more than three times their share of
Spanish banks decreased their reliance on the central bank to E126
billion from E140 billion in July. Nevertheless, this still
significantly exceeded the E91 billion borrowed in April before concerns
over the country’s banking system erupted.
Borrowing from Greek and Portuguese banks remained largely
unchanged in August at E95.9 billion after E96.2 billion and E49.1
billion after E48.8 billion, respectively. Irish banks’ ECB borrowing,
on the other hand, rose notably to E95.1 billion from E89.5 billion in
July, hitting the highest level since January.
While hawkish Council members Axel Weber and Yves Mersch suggested
that the central bank might announce a further unwinding of
non-conventional support measures in December, the stubborn dependency
of peripheral banks on ECB funding raises questions over the central
bank’s ability to withdraw support.
Potential spillover effects of a liquidity shortage in the
periphery’s banking system on the sovereign debt worries have thus far
deterred the central bank from pushing ahead with its exit, even as
overall money market conditions have continued to recover.
With the Basel III accord, life for banks in the periphery has
become more difficult and unless an alternative solution is found, the
ECB might have to continue providing generous liquidity well into next
year. This is especially true as long as the debt worries, which forced
the ECB to step up its bond purchase last week to the highest level
since mid-August at E237 million, persist.
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