FRANKFURT (MNI) – Although tougher regulations in the financial
sector are necessary, they must not undermine the nascent recovery,
which is already threatened by the sovereign debt crisis, European
Central Bank Governing Council member Michael Bonello said Friday.

Regulators must ensure as well that banks return to their core
business of lending to the real economy. Banks should no longer engage
in the risky behavior that precipitated the crisis, Bonello urged in the
text of a speech for delivery to the Institute for Financial Services in
Malta.

Bonello, who is the governor of Malta’s central bank, urged banks
to build sufficient capital to cover their risks. And he sounded a note
of caution on the proposal for a global bank tax.

The many proposals currently being discussed for banking and
financial market reforms “represent the coming together of an ambitious
regulatory reform effort designed to strengthen the resilience of the
financial sector that could have far-reaching implications,” Bonello
said.

Looking ahead, the results of an impact assessment study “should
provide useful guidance as to the optimal timing and sequencing of these
reforms,” he explained.

“In this regard, care must be taken to avoid any risk of
undermining the incipient recovery, which is already threatened by the
current sovereign debt crisis,” he cautioned.

“We must ensure that banks, especially the larger ones, go back to
their core business of extending credit to the real economy and refrain
from engaging in the kind of risk-taking that gave rise to the recent
crisis,” he said.

“Priority must, therefore, be given to the one measure that is most
likely to influence the banks’ ability to take risk” — namely building
up bank capital, Bonello said. “Capital buffers must henceforth be
commensurate with the degree of risk undertaken. It is no longer
acceptable that profits are privatised and losses socialised,” he
asserted.

Bonello also said it was “important to aim for a level-playing
field and to minimise the potential for arbitrage through harmonization,
particularly in the case of the proposed bank levy.”

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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