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European Central Bank: Euro zone banks may need more buffers

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Euro zone
regulators should consider forcing banks to build bigger capital buffers as
protection against an even bigger downturn that could lead to a credit crunch,
European Central Bank Vice President Luis de Guindos said on Wednesday.

Having
amassed capital over the last decade, the currency bloc’s biggest banks are now
well positioned to weather a downturn, but most still lack an extra capital
buffer that could be freed up during periods of stress.

“Even if we
consider the level of capital to be appropriate, there still seems to be scope
to have a higher share of capital in the form of releasable buffers,” de
Guindos told a bank supervision conference.

The problem
is that in a downturn, banks hold up their capital ratios by deleveraging and
disposing of assets, restricting credit to the real economy and aggravating any
contraction.

Letting
capital ratios fall is hardly an option, however, as this would restrict
lenders’ ability to pay dividends, a move frowned upon by shareholders.

Only seven
of the 19 euro area countries have activated a countercyclical buffer and only
a “very limited” amount of capital has been built so far, a potential risk to
the economy.

De Guindos
also warned that the global economic outlook was deteriorating, and uncertainty
was on the rise, creating a difficult environment for a bank sector that is
already struggling with weak profitability, high costs and excessive
competition.

“This environment might put pressure on banks’ profitability and hamper their intermediation capacity as margins become squeezed and the flow of new business slows down,” he added.

source: Reuters

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