FRANKFURT (MNI) – New Basel III capital and liquidity standards for
bank could have some negative short-term impact on economic growth, but
the long-term effect of the reforms should be beneficial, the Bank of
Malta said Tuesday in its third quarterly review for 2010.

The Maltese central bank also reiterated the European Central
Bank’s underlying scenario of moderate growth in the second half of this
year and a similar pace next year.

Basel III reforms “may have some short-term negative impact on
economic growth. The requirement to hold more capital may translate into
higher costs for bank customers, whether in the form of higher lending
interest rates or lower deposit rates, besides the possibility of
rationed credit,” the bank said.

“Likewise, the need to hold more liquid assets and a rebalancing in
the long-term funding of banks could compel some institutions to revise
their business models,” it added.

“However, the long-run impact is expected to be beneficial as these
new requirements should reduce the probability of a future crisis and
associated costs to the economy as a whole,” the bank elaborated.

“Real GDP growth in the euro area is expected to moderate in the
second half of the year, due to weaker support from policy stimuli and
the inventory cycle, while it is forecast to remain moderate in 2011 as
exports continue to increase and domestic demand gradually rises,” the
bank forecast.

“Meanwhile, inflation is expected to remain contained,” it said.

The bank said that the ECB’s moves on liquidity policy in September
may have contributed to a return to normal market conditions.

In September the Governing Council renewed its policy of conducting
weekly MROs and special-term refis of one maintenance period as fixed
rate procedures with full allotment for as long as necessary.

And it extended through the fourth quarter its fixed-rate, full
allotment terms on three-month LTROs while fixing their cost to the
average MRO rate over the life of the operations. It also added three
further fine-tuning ops through the end of the year to help smooth any
liquidity problems that might arise.

“As a result of these measures, liquidity provisions remained
ample,” the Bank of Malta said. “Money market interest rates appeared to
have stabilised and then rose slightly, which could be a sign of a
return to more normal levels of interbank activity.”

Until recently, it was considered certain that the ECB would engage
in further mild tightening of monetary policy at its next meeting
Thursday, the most likely move being a return to competitive bidding at
its three-month refinancing operations.

But given the intensifying peripheral tensions in Europe, there is
a significant chance that the central bank might choose the lowest
common denominator — ie, standing pat while claiming that the
expiration in December of the last 12-month LTRO constitutes a further
step towards the exit.

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

[TOPICS: M$$EC$,M$X$$$,MT$$$$,MGX$$$,M$$CR$]