On Monday European Central Bank chief supervisor Claudia Buch told euro zone finance ministers that governments should avoid lowering banks' capital requirements, arguing such a move would not materially increase lending while demand remains weak and a range of risks persists.
Buch said that although euro zone banks are being examined by European Union lawmakers seeking ways to improve their international competitiveness relative to U.S. peers, preserving robust capital and liquidity positions is essential.
Addressing the Eurogroup, she listed several risk factors that, in her view, justify keeping capital standards firm - including the war in the Middle East and its economic fallout, strains in private markets and the threat of cyberattacks. "Banks currently have sufficient capital to lend to the economy, but elevated risks, lower risk tolerance and weak demand for loans are preventing the supply of credit from expanding more quickly," she said in prepared remarks.
Buch cautioned that reducing capital requirements in the present environment could simply channel additional funds to shareholder distributions instead of increasing lending to businesses and households. "In this situation, lowering capital requirements may simply result in higher distributions to shareholders rather than more lending to firms and households," she said.
Beyond capital levels, Buch reiterated the ECB's long-standing advocacy for measures that would strengthen the euro area's financial safety net and promote the free flow of liquidity and capital across borders. She restated calls for creation of a common deposit guarantee scheme and for removing regulatory barriers between countries that impede cross-border liquidity movements.
On supervisory practice, Buch affirmed that the ECB's approach to bank consolidations will not privilege domestic over cross-border deals, saying supervisors will "treat cross-border and domestic mergers alike." Her remarks coincided with a high-profile takeover attempt by Italy's UniCredit for Germany's Commerzbank, a deal that has met strong opposition from the German government in Berlin.
The core of Buch's message to finance ministers was that, given current risk conditions and subdued loan demand, policy efforts to shore up cross-border frameworks and reduce regulatory fragmentation are preferable to lowering capital requirements as a means to boost credit supply.