Regulators must take care that new capital requirements known as the Basel III rules don't become such a burden for banks as to weigh on the wider economy, says Yves Mersch, a member of the European Central Bank's governing council. "Although these rules are necessary, it's vital to strike a balance between the economic efficiency of an intermediation system and its stability," the Luxembourg central bank chief says in a report Thursday on financial stability. "If, in a short lapse of time, the banking system is weighed on exaggeratedly, it won't have the means to ensure the effective financing of the economy."
The Basel III accords were developed by central bankers and bank regulators to prevent a repeat of the financial crisis. Drawn up during meetings in Basel, Switzerland, they raise the amount of low-risk capital banks are required to set aside as a buffer against market shocks. Countries are now in the process of writing them into law.
Some economists worry that the new international standards will curtail financing and hurt the global economy. The Organization for Economic Cooperation and Development estimates that in the medium term, Basel III will cut the gross domestic product of its members 0.05-0.15 percentage points per year.
Mersch said the new laws shouldn't delve into detail and that banks should be left with enough room to make a profit.
"We need to avoid that detail dominates the spirit of the new regulation, or we can consider it to be already obsolete," he said. "It's clear that if one overloads the industry with constraints, the regulatory pressure risks causing the transfer of banking activities to other players, such as the shadow banking system."
The solvability and liquidity ratios of Luxembourg's banking system are " quite high," Mersch said. The country's lenders have a "comfortable level" of capital, but some banks still need to "make up for some residual frailty."
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The Basel III accords were developed by central bankers and bank regulators to prevent a repeat of the financial crisis. Drawn up during meetings in Basel, Switzerland, they raise the amount of low-risk capital banks are required to set aside as a buffer against market shocks. Countries are now in the process of writing them into law.
Some economists worry that the new international standards will curtail financing and hurt the global economy. The Organization for Economic Cooperation and Development estimates that in the medium term, Basel III will cut the gross domestic product of its members 0.05-0.15 percentage points per year.
Mersch said the new laws shouldn't delve into detail and that banks should be left with enough room to make a profit.
"We need to avoid that detail dominates the spirit of the new regulation, or we can consider it to be already obsolete," he said. "It's clear that if one overloads the industry with constraints, the regulatory pressure risks causing the transfer of banking activities to other players, such as the shadow banking system."
The solvability and liquidity ratios of Luxembourg's banking system are " quite high," Mersch said. The country's lenders have a "comfortable level" of capital, but some banks still need to "make up for some residual frailty."
www.dowjones.com
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