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Capital is not a panacea

Brussels, the Basel Committee, and other regulators striving to increase the minimum reserves of the banks have apparently got it wrong. Regulators wanting to reduce the risk of a further financial and economic crisis should concentrate their efforts somewhere else, according to the European Banking Federation (EBF).

It seems that fun at EBF’s recent celebration in Brussels of fiftieth anniversary was hardly spoiled by any contribution by the banking sector to the crisis. In fact, the good mood was disturbed by little more than a shoulder shrug from the 200 bankers present when they heard a comment by senior European Commission official, David Wright.

Wright, a deputy director general dealing with financial legislation, dared to point out that the crisis is costing Europe a 6% drop in GDP, as well as high unemployment. He also noted that European governments now have to contribute 12% GDP in propping up banks.

“In the end, there is going to have to be more capital in the banking sector,” he stated. Presumably, this sets the scene for continuing conflict between regulators and the banking sector, with no sign of a compromise.

On this central issue, Alessandro Profumo, president of the EFB, repeated a long-term position that entirely contradicts views of the EU finance ministers, the Basel Committee, the G20 and, not forgetting, Wright. “Too much attention is being placed on strengthening the capital base,” said Profumo, who is also CEO of Unicredit.

“Weak risk management practices, poor internal governance and light supervision, together with inter-connectedness, were the triggers of the crisis… [While some banks should] reinforce their capital… it is not a panacea.”

Profumo warned that the emphasis on increasing capital reserves could result in banks having to shrink their balance sheets; borrowers will bear higher costs, the economy will weaken or the recovery will be prolonged and taxpayers will have to bear the cost of an extended crisis.

Reaction by the pension fund industry to the conflict between the regulators and the banks comes down on both sides. Naturally, as serious investors in banks they want them to be profitable.

“We don’t want to see any more collapses,” says Angel Martínez-Aldama, chairman of the European Federation for Retirement Provision and director-general of Inverco in Madrid.

He suspects that the aversion by banks to reserve capital increases could be a negotiation tactic, “like a poker game”. However, the lobby groups are powerful in Brussels.

Elsewhere, the gloom continues in the corridors of the European Commission’s internal market division, and there is unhappiness at the stagnation of financial legislation. Officials are not happy with the delay to the upgrading of financial consulting bodies to authorities, which has been postponed to next year.

Also, they also do not relish a record-breaking flood - 1,300 or thereabouts - of amendments tabled by MEPs to the Alternative Investment Fund Directive to regulate hedge funds. They view this, wryly, as driven by vested interests motivated to drive the directive into the sand.

However, perhaps happier times are in the offing following the appointment of a number of new commissioners, including Frenchman Michel Barnier. But will the new appointees actually succeed in getting the legislative
process moving again?
 

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