EBA warns banks to free up lending

THE European Banking Authority (EBA) has warned lenders against being so risk-averse as to prompt a credit crunch.

It also said regulators would not allow a cut in lending as a means to meeting regulatory capital targets.

Banks have changed their behaviour far more than the public has realised in the wake of the financial crisis, EBA head Andrea Enria told German magazine Der Spiegel in an interview.

“At the moment, our concerns have gone to the other extreme: that we could now have the problem banks are too risk-averse, which could ultimately lead to a severe credit crunch.”

Lenders around Europe will need to drum up about €115 billion in extra capital by the end of next June, in order to meet a regulatory capital target set by the watchdog.

Banks can retain earnings, curb dividends and bonuses, sell off chunks of their businesses or reduce risky assets to meet the target, but Mr Enria put them on guard if they were thinking of choking off loans.

“If a bank reduces its lending to small and medium-sized enterprises, it won’t be counted (toward meeting the target),” he said. “We will not allow credit supply to be cut.”

Banks have until January 20 to present their road maps for meeting the regulatory capital target to banking supervisors.

Loan portfolios can be sold, even to hedge funds, to help bolster banks’ equity capital cushions, Mr Enria said.

The EBA wants banks to reach a core Tier 1 regulatory capital ratio of 9% by the mid-2012 deadline, which should help lenders withstand market deterioration.

The stress tests of banks, based on data from the third quarter, revealed six German lenders need €13.1bn of extra capital to meet the deadline, nearly triple the previous estimate.