December 15, 2011 / 3:08 PM / 6 years ago

ECB's Draghi warns of impact of tough capital rules

BERLIN (Reuters) - European Central Bank President Mario Draghi urged banking authorities on Thursday to ensure that tougher capital rules do not lead to a credit crunch, acknowledging for the first time that tighter regulation could hurt fragile economic growth.

The European Banking Authority has said commercial banks should have core Tier 1 capital of at least 9 percent of risk-weighted assets — higher than the 7 percent minimum world leaders have agreed to phase in from 2013.

The ECB has previously said that tougher requirements would not hurt economic growth, but Draghi expressed concerns on Thursday about the impact on lending to the private sector.

“Banks in the euro area have recently come under pressure both as regards their capital bases and their funding conditions,” Draghi said in a speech in the German capital.

“The plan to strengthen their capital bases is an attempt to reinforce their standing in financial markets, but this is not an easy process.”

“Public authorities ought to cushion the impact on the real economy, and banks should consider restraining dividends and ad hoc compensation to strengthen buffers,” he said in a speech in the German capital.

He said shareholders are not always receptive to raising capital levels, but he added that other options are worse for their economic impact.

“Selling assets is less preferable and curtailing credit to the real economy is even worse,” Draghi said in the Ludwig Erhard lecture.

The EBA has estimated that European banks need an additional 114.7 billion euros of extra capital to reach the new standard.

EBA head Andrea Enria told a German magazine earlier in the week that regulators would not allow a cut in lending as a means of meeting the regulatory capital targets.

Draghi said the central bank had done its part in protecting the flow of loans to the private sector by having taken new measures to help banks last week.

In addition to cutting rates by 25 basis points to a record low of 1.0 percent, the ECB eased collateral rules, announced ultra-long 3 year liquidity operations and cut the required reserves ratio.

Draghi said the measures were needed to ensure the interest rate cut was felt in the economy.

“The current package should be felt tangibly in the financial sector and the real economy over the coming weeks and months. Of course, it comes against strong headwinds generated by deleveraging,” the Italian said.

Draghi estimated that the decision to reduce bank reserves ratio to 1 percent from previous 2 percent alone frees up about 100 billion euros in bank liquidity.

He also reiterated that the ECB’s bond-buying program was “neither eternal nor infinite”.

The bank has spent more than 200 billion euros on government bonds since May 2010 through its open-ended Securities Markets Program. But it has bought relatively little in recent weeks despite widespread calls for it to ramp up the program to help the euro zone’s debt-laden periphery.

Turning to the recent EU summit, the ECB head said the decisions reached were “a breakthrough for clear fiscal rules in our monetary union.” Those decisions, Draghi added, should be implemented swiftly.

Writing by Sakari Suoninen; Editing by Hugh Lawson

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