Bloomberg News

Higher Bank Capital Rules May Lead Europe to Recession, EFG Says

October 25, 2011

Oct. 25 (Bloomberg) -- European regulators should postpone an intended increase in core Tier 1 capital requirements as any immediate change would tip Europe into recession, the chief economist at EFG Eurobank Ergasias SA said.

Bank regulators are reported to be considering an increase in core Tier 1 capital level, a measure of financial strength, to 9 percent from 7 percent by mid-2012, as part of a wider plan due to be announced on Oct. 23 to stamp out the sovereign-debt crisis which has driven Greece toward default, roiled global markets and dented confidence in the survival of the 17-nation euro area.

While banks need to shore up their capital base to “be able to withstand country defaults,” the intended increase in the core Tier 1 capital rule is “a pro-cyclical regulatory policy as it would force banks to cut lending and would result in a recession in Europe,” Gikas Hardouvelis, told a business forum in Belgrade late yesterday.

“Such restrictions should be imposed after the crisis is over, not during the crisis,” said Hardouvelis. “This is what economic theory says.” He added banking authorities are expected to “lower the bar for banks” rather than push it even higher at a time when European economies need “to switch to an agenda of growth” from the “current obsession with fiscal discipline.”

--Editors: Douglas Lytle, Balazs Penz

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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