Over-regulation fears for EU banks

Over-regulation in EU Banks

While many experts believe tougher rules remain essential for recovery, European bankers have warned that excessive regulation in response to the global financial crisis could endanger growth in the real economy.

Europe's biggest bank, HSBC, have started the discussion, with chairman Stephen Green stressing a "real danger" that doctrinaire policy and demands that banks hold more capital could have perverse effects on the economy and society.

At a conference in London yesterday, Green told his audience that, "culminative enhancement of capital rations could easily withdraw credit from the economy and cause a fresh credit crunch." In turn, suggest his warnings, this could interrupt and delay an already fragile recovery.

"Indiscriminate tightening" of regulation rules

Green's concerns have been backed by Emilio Botín, chairman of Spain's Santander, the eurozone's biggest bank by market capitalisation, who agreed that "indiscriminate tightening" of regulation rules would only be counterproductive. Botín also defended large international banks' role in the ensuing recovery, emphasising how "we must not underestimate risk."

At a separate conference at Santander's Spanish headquarters, Botín warned that regulators must not "tip the scales too far the other way and indiscriminately establish greater capital requirements that will undoubtedly affect the cost of lending and access to credit."

Debate

But concerns by some banks have been counteracted by others within the eurozone. Former French central bank governor Jacques de Larosière, for instance, who recently chaired a high-level group charged with suggesting ways to improve supervision in the EU, is urging that his set of proposals not be watered down. "It strikes the right balance and must not be weakened. If we start tinkering then we are back to square one," he warned.

Overall, bankers' attitude towards proposed rules and regulations differ greatly across Europe. Those in attendance at Santander's conference near Madrid, for instance, all expressed surprise not over Botín's arguments in favour of modest capital rules but, by the agreement of some of the other participants from governments and international organisations.

As such, larger banks, accused of depending too much on state support, are now arguing that size itself does not increase the "systemic risk" posed by a bank's risk management. Now big banks such as Spain's Santander and BBVA - the biggest two in Spain - suggest that much depends on whether a bank is engaged primarily in relatively safe retail banking and how much risk management plays a role within a large bank's operations.

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