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Banks May Be Pressed by EU to Hoard Extra Capital in Boom Times

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The EU internal markets commissioner Michel Barnier
Lenders may be expected to hold the extra capital during boom times in a bid to prevent another financial crisis, said Chantal Hughes, a spokeswoman for EU Financial Services Commissioner Michel Barnier. Photographer: Hannelore Foerster/Bloomberg

Oct. 22 (Bloomberg) -- Banks may be pushed by the European Union to hoard extra capital buffers beyond minimum requirements proposed by global requlators last month.

Lenders may be expected to hold the additional capital during boom times in a bid to prevent future financial crises, under European Commission plans published today. Banks in the 27-nation EU may be banned from paying dividends and bonuses if they fail to meet the targets to stem the flow of cheap money.

“A vital lesson from the financial crisis is that banks must hold sufficient levels of capital,” said Chantal Hughes, a spokeswoman for EU Financial Services Commissioner Michel Barnier.

The Basel Committee on Banking Supervision gave regulators the option of introducing an additional capital buffer to curb the excessive lending that led to the worst financial crisis since the Great Depression. The buffer would also help lenders absorb losses in a recession. Last month’s Basel proposals are the strictest since nations began regulating the global banking system together in 1974.

The EU plan would be in addition to minimum capital requirements and a so-called capital conservation buffer proposed by the Basel committee, the commission said on its website. Lenders have until Nov. 18 to comment on the measures.

The European Banking Federation, an industry lobby group, said it’s already signaled its “serious concerns at the imposition of yet another layer of buffers” to the Basel committee. “New European measures would only make the matter worse,” it said in an e-mailed statement.

Loss-Absorbing Capital

The Basel group agreed that the so-called countercyclical capital buffer could be as large as 2.5 percent of bank’s assets, and that it should be made up of common equity “or other fully loss-absorbing capital.” The buffer would be introduced at times when regulators deem bank lending to be excessive.

The commission said banks could draw on the buffer “to continue lending and borrowing when economic conditions worsen,” the commission said. The buffer would “dampen demand where there is evidence that credit levels are growing above established benchmarks.”

The capital add-on may make it harder for companies to get access to credit, said Erik Berggren, senior adviser for financial services at Business Europe, an EU employers’ federation based in Brussels.

The measure should be included in a report examining the combined effects of changes to EU financial laws, Berggren said. “We are worried that we have not seen such a study come out of the European Commission so far,” Berggren said.

To contact the reporter on this story: Jim Brunsden in Brussels.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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