Bloomberg News

Bank Overhaul Mess Is Noose Around EU’s Neck, EBF Says

April 13, 2012

Christian Clausen, chief executive officer of Nordea Bank AB and president of the European Banking Federation. Source: Nordea Bank AB via Bloomberg

Christian Clausen, chief executive officer of Nordea Bank AB and president of the European Banking Federation. Source: Nordea Bank AB via Bloomberg

Global financial regulators have failed to create clear standards for banks, meaning lenders are hoarding cash instead of providing loans needed to drive growth, European Banking Federation President Christian Clausen said.

“This is the biggest change in the banking system ever seen; all items in the balance sheet are in play,” Clausen said in an interview in Stockholm yesterday. “The incentive for banks, even though they have built up their capital, to actually go out and support good initiatives is very limited.”

Since the 2008 global financial crisis routed markets, sent unemployment soaring and some governments toppling, policy makers have looked for ways to guard against a repeat of the turmoil by requiring banks to build up bigger buffers. The Basel Committee on Banking Supervision wants lenders to target core capital of at least 7 percent of their risk-weighted assets, compared with as little as 2 percent before the crisis. The European Banking Authority has set a temporary 9 percent target for some lenders.

Several of the new standards lenders need to adopt are confusing, said Clausen, who is also the chief executive officer of Nordea Bank AB (NDA), the largest Nordic lender. That means banks are erring on the side of caution as they navigate through a shifting regulatory environment, he said.

Europe’s determination to impose strict regulatory guidelines on its banks is the main reason its economy is underperforming the U.S.’s, said Nick Davey, a London-based analyst at UBS AG.

Basel ‘De-Emphasized’

“In the U.S., Basel III has been de-emphasized and the banks are free to deploy capital to pursue growth,” Davey said. “In Europe, the constant drive for more and more capital, uncertainty over funding rules, and the prioritization at a sovereign level to promote austerity, not growth, creates an unhelpful foundation for the banking sector, and disincentives to lend.”

The 17-member euro region -- where Greece, Portugal and Ireland are relying on international bailouts to stay afloat -- will contract 0.3 percent this year, the European Commission said Feb. 23. The U.S. economy will grow 2.2 percent in 2012, the World Bank said Jan. 18.

In Sweden, where Nordea is based, the government wants its four biggest lenders, including Svenska Handelsbanken AB (SHBA), SEB AB (SEBA) and Swedbank AB (SWEDA), to hold more capital than the EU’s minimum requirement. The four need to target 10 percent buffers from January and 12 percent from 2015, Sweden’s regulator said in November. The government of Prime Minister Fredrik Reinfeldt argues the stricter rules will protect taxpayers from losses in future financial crises.

Siding With Taxpayers

“There will always be tension between regulators and bankers,” Peter Norman, Sweden’s financial markets minister, said in an interview in Stockholm. “Bankers want absolute minimum rules for everything and to be able to raise the bar to where they think it should be. We must always side with the taxpayers.”

Nordea had a core Tier 1 capital buffer -- a measure of financial strength -- of 11.2 percent of its risk-weighted assets at the end of last year. While Clausen says Sweden’s capital requirements are too high, a bigger problem is the confusion surrounding regulatory measures, he said.

“It was 7 percent, now it’s 9 percent or 10 percent on capital. And the liquidity coverage ratio has been watered down a little, but it’s still there,” Clausen said. “But there’s still the net stable funding ratio, which is completely uncertain.”

‘No Way’

Basel III’s net stable funding ratio requires lenders to cut their reliance on short-term money markets by boosting holdings of debt with longer maturities. Equities can be used in calculating that ratio, which is scheduled to become binding from 2018.

The European Banking Authority estimates lenders in the region had an average net stable funding ratio of about 90 percent relative to their liquid assets at the end of June last year, according to a survey of 157 lenders.

“To fulfill the minimum standard of 100 percent on a total basis, banks need stable funding of approximately 1.9 trillion euros,” ($2.5 trillion) the EBA said in an April 4 report.

“There is no way you can add that to the system, at least not right now,” Clausen said. “So, to take some of these things off of the table now will calm down the anxiety in the market and the bank sector and allow some refinancing of the real economy.”

‘More Manageable’

The largest global banks would have needed to find a combined 1.76 trillion euros in easy-to-sell assets to meet a minimum liquidity rule set by Basel had the standards been enforced last June, the group said yesterday. The net stable funding ratio shortfall was 2.78 trillion euros, it said.

It seems “regulators still need to find some other asset class that can count as a liquid asset to make this ratio more manageable for banks,” Prateek Datta, an analyst at Royal Bank of Scotland PLC in London, said in an e-mail.

The 43-member Bloomberg Europe Banks and Financial Services index fell 1.2 percent as of 1:32 p.m., after gaining 1.4 percent yesterday.

Europe’s banks face further stresses as the region’s debt crisis, now in its third year, shows signs of flaring up anew. The boost given to Spanish and Italian debt markets by European Central Bank cash since December is wearing off and the nations’ 10-year bond yields are again well above 5 percent. That’s spurring debate on whether Europe has failed to implement growth-friendly policies.

“There is one thing out there that is gaining traction in discussions and that’s the risk that we won’t generate growth in the economy,” Clausen said. “One of the big uncertainties that politicians should really be aware of is the ever-growing level of capital and funding regulation.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.


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