S should rapidly build up capital buffers to create a solid foundation for economic growth and relieve pressures on indebted sovereigns, the international Financial Stability Board (FSB) claimed in a new report last night, arguing that short-term costs of cutting lending are rapidly repaid.
The FSB also told the G20 nations that more cross-border action is needed to draw up practical resolution procedures for systemically important banks to prevent them devastating the financial system in any collapse, and said some national regulators are not sufficiently independent from their governments.
In the wake of the financial crisis, new regulations were drawn up to bolster banks’ capital positions and ensure they can survive future financial shocks without needing government aid.
While that is supposed to be good for the economy in the long-run, critics say it has short-term costs as banks have to cut lending to shore up their positions.
However, the FSB believes the opposite is true, as stronger banks can access funding more cheaply, and can pass that on to business and household customers to the benefit of the wider economy.
“The evidence is clear – measures to strengthen financial stability support economic growth and create jobs rather than hold them back, even in the short term,” insisted FSB boss Mark Carney.
“Credit growth has resumed in those countries where financial institutions have decisively strengthened their balance sheets.”
Indeed, banks which seize the chance to strengthen their positions will be able to take market share from banks elsewhere which are still struggling by with higher funding costs, the FSB believes.
That should also have the added advantage of relieving financial pressures on governments which are currently facing the risk of bailing out troubled banks.