The banks must strengthen themselves, otherwise the risk of a crisis in the system would be greater. Word of Andrea Enrico, president ofEuropean Banking Authority. The concerns of the banks in the face of the new capital requirements that are being requested by Europe "are excessive". On the contrary: “Higher levels of capital will help reduce the probability of default of individual institutions and therefore reduce the cost of funding and make the eventuality of systemic crises more remote. This is the main way to allow banks to continue to play their role in supporting businesses and households”, articulated Andrea Enria, number one of the EBA during his hearing before the Finance Commission of the Chamber. AND Enria recalls how according to the OECD, which provides specific estimates for the euro area, the new rules would reduce – in the worst case scenario – the growth rate of gross domestic product by around 0,23 percentage points per year (0,15 on average for the euro area , United States and Japan). But "this eventual cost must be compared with the benefits in terms of reducing the probability of crises in the future and the consequent contraction of GDP", he points out.
The crisis that has hit the global economic system since 2007 “has brought to light the weaknesses of the banking and financial sector. Financial regulation and supervision have not been able to prevent the accumulation of risks and their materialisation”. And therefore “the first – perhaps the most important – objective of the Basel 3 proposal is to strengthen the quality of capital. In fact, the crisis has shown how less stringent criteria for the computability of equity instruments, often connected to phenomena of "lower competition" between national legal systems, can damage financial stability". And if on the one hand "the banking industry has often shown concern about the tightening of requirements and the possible negative repercussions on the ability of intermediaries to support the real economy, reducing growth prospects and influencing employment prospects", on the other – Enria meticulously underlines – “the EBA has not changed the prudential rules, let alone the accounting rules. Rather, in the light of the tensions on the financial markets, it has asked the banks to set up an additional, temporary and exceptional capital buffer to deal with the systemic risk generated by the sovereign debt crisis".
According to Enria, a postponement of recapitalizations for European banks would be a wrong and very negative choice. “Right now – he clarifies – the banks need more liquidity and more capital, to be able to guarantee support for the economy. The ECB is working on the liquidity front. The supervisory authorities have the task of intervening on the capital. The scenario – he added – in which the recapitalization is postponed would, in my view, be particularly negative”. The president of the EBA explains: “If the recapitalization were canceled, the problems of the banks, which had emerged well before the EBA announced its measures, would not disappear. Investors would continue to perceive banks as weak and greater uncertainty would surround the European banking system. The problems on the funding side, which also depend on the levels of capital considered inadequate with respect to the risks, would remain unchanged. The consequence would be an even stronger deleveraging than what has already occurred so far. Recapitalization is therefore essential, preferably through private placements. Governments have also undertaken to offer their financial support to banks that should not be able to access private capital, possibly resorting to the EFSF”.
And therefore, in conclusion, Enria indicates those which according to the EBA these are the rules that credit institutions but also politics will have to follow: “Banks will have to operate on a stable basis with significantly higher levels of capital – of high quality – than in the past; they will need to have sufficient liquid asset buffers to survive without aid in stressed situations and will no longer be able to finance unlimited long-term illiquid assets with short-term and volatile funding sources; requirements for capital market activities have been recalibrated to better capture risks; systemically important banks will have to comply with even more stringent requirements and will have to operate in such a way as to make it possible for them to exit the market in a crisis situation, without the need for public finance interventions”.
Not only that: “The second phase of the crisis, linked to sovereign debt, requires the same rigor in the response of public policies. It is essential that banks have access to unlimited liquidity, even on medium and long-term maturities, at low prices: with the blockage of the wholesale banking funding markets, banks were in fact losing their ability to finance the economy”. The president of the EBA does not hide the fact that we are facing "a difficult passage, which could affect the control structures of the banks and in some cases also request interventions of public support. But - he concludes - it is necessary to give a clear and firm answer to the current uncertainties. This path is undoubtedly preferable to more timid and less timely solutions, which in all probability would prolong the crisis and increase its final cost”.
Attachments: Full text of the hearing.pdf
