EU Weighs Bank Capital Rule Change to Spur Long-Term Lending

The European Union is weighing changes to bank capital rules in a bid to spur long-term investment threatened by the bloc’s sovereign-debt crisis.

The European Commission will seek views on whether “particular types of long-term investments merit preferential capital requirements,” according to draft plans obtained by Bloomberg News. The EU’s executive arm is also weighing options to stimulate the market for covered bonds and high-quality securitized debt.

“If used well, high-quality securitization can be an important long-term financing instrument available to investors” and can reduce companies’ “excessive reliance on bank funding,” according to the document.

Michel Barnier, the EU’s financial services chief, has pledged proposals to bolster lending to businesses and research projects as austerity takes its toll across the 27-nation EU. The European Central Bank estimates that bank lending to non-financial companies fell by 2.1 percent between September 2011 and June 2012.

The commission is seeking to “examine the impact of prudential rules on long-term investments,” Stefaan De Rynck, Barnier’s spokesman, said in an e-mail. Barnier’s goals include attracting more stable funding for major infrastructure projects and environmental technologies, he said.

Covered Bonds

The paper is still being worked on and is set to be published “in a few weeks,” he said.

On covered bonds, the commission is weighing whether “greater harmonization, at least with respect to transparency and disclosure,” could spur the market, according to the draft plans. Covered bonds are secured by assets such as mortgages or public-sector loans and are guaranteed by the issuer.

Attempting to use capital rules to unleash long-term investment would add to an overhaul of global requirements drawn up to bolster banks’ reserves after Lehman Brothers Holding Inc.’s 2008 collapse.

The international measures, set by the Basel Committee on Banking Supervision, force banks to hold capital against their lending, with the amount of capital linked to the riskiness of their investments. The EU has missed a Jan. 1, 2013, deadline to begin phasing in the standards.

Liquidity Requirements

The EU is also considering how bank liquidity requirements can “be best designed in order to balance different objectives, including the incentives for long-term financing,” according to the document.

As well as bank capital requirements, the commission is also weighing possible measures to spur long-term investment by insurance companies, according to the document.

The commission has asked regulators to examine whether capital requirements for insurers “should be adjusted to ensure there are no obstacles to long-term financing, albeit without creating additional prudential risks,” according to the draft plans.

Areas where insurers’ capital rules should be reviewed include infrastructure financing, investment in small businesses and debt securitization, according to the document.

(Updates with comment from Barnier’s spokesman in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE