Banks benefit on regulation

City A.M. Reporter
THE $1 trillion (£672bn) rescue package to stabilise the euro could bolster European banks’ negotiating power as they attempt to fight stricter regulatory capital requirements they expect will hurt economic growth.

Europe’s lenders are already significant holders of sovereign euro debt and will be relied upon to buy more state-guaranteed debt as part of the rescue package, which is likely to see them push for extra concessions, analysts said.

“What there needs to be is a realisation among politicians that you cannot legislate and regulate the banks'’profitability away and expect them to keep buying your debts,” MF Global bank sector analyst Simon Maughan said.

Proposals to tighten bank capital requirements by the Basel Committee on Banking Supervision, due to be implemented by the end of 2012, have attracted criticism from banks, including BNP Paribas, Deutsche Bank and RBS. The new euro rescue package, which will also see the European Central Bank buying euro sovereign debt, could support the banks’ view that the recovery is already fragile enough without extra regulation.

“This highlights how fragile the recovery is... We know that Europe is in a tight spot and the last thing you want to do is put undue further pressure on the banks,” said a London-based financial analyst.

Although the consultation period for the proposed Basel III requirements is over, banks could use the rescue package to extract better terms on the implementation deadline.

The G20 group of leading countries agreed last year to introduce Basel III by the end of 2012 but included some wiggle room as the new rules will only take effect if economic recovery is assured.