Risk-shy banks may prompt credit pinch: EU watchdog

Sun Dec 11, 2011 9:38am EST
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FRANKFURT (Reuters) - The European Banking Authority (EBA) has warned lenders against being so risk-averse as to prompt a credit crunch.

It also said regulators would not allow a cut in lending as a means to meeting regulatory capital targets.

Banks have changed their behavior far more than the public has realized in the wake of the financial crisis, EBA head Andrea Enria told German magazine Der Spiegel in an interview.

"At the moment, our concerns have gone to the other extreme: that we could now have the problem banks are too risk-averse, which could ultimately lead to a severe credit crunch," Enria said in the interview in the magazine's Monday edition.

Lenders around Europe will need to drum up about 115 billion euros ($154 billion) in extra capital by June 30 to meet a regulatory capital target set by the watchdog.

Banks can retain earnings, curb dividends and bonuses, sell off chunks of their businesses or reduce risky assets to meet the target, but Enria put them on guard if they were thinking of choking off loans.

"If a bank reduces its lending to small and medium-sized enterprises, it won't be counted (toward meeting the target)," he said. "We will not allow credit supply to be cut."

Banks have until January 20 to present their roadmaps for meeting the regulatory capital target to banking supervisors.

Loan portfolios can be sold, even to hedge funds, to help bolster banks' equity capital cushions, Enria said.   Continued...