30 March 2012

Reuters: European Union told to handle fragile banks with care

European Union finance ministers were warned of the continued fragility of the region's banks on Friday, as the bloc's executive postponed a contested proposal critics warn could make nervous banks even more reluctant to lend. (Includes quote from Graham Bishop.)

In a report prepared for the EU finance ministers' meeting in Copenhagen, EU officials warn of possible problems in banking. They flag the risk that banks would be unwilling to write down bad loans, something that in turn would prevent them from giving new credit.

Michel Barnier, the European commissioner responsible for drafting this and other regulation, has been postponing its publication for fear of unsettling investors, already rattled by billions of euros of losses in a Greek debt restructuring.

The new rules for failed banks, seen by many experts as one of the central regulatory reforms needed to strengthen the financial system, will only apply from 2013 at the earliest. This is roughly six years after the start of the banking crisis in Europe.

The delay has upset European regulators, who have informed ministers that it aggravates uncertainty for investors, said one official familiar with the matter.

Critics point to the risks that could further drag out discussions with EU countries, whose blessing is needed for the proposal to become EU law. "If the banks cannot raise longer-term money, then they will have to shrink the amount of credit to the economy, which - in plain terms - means calling in loans to SMEs and individuals," said Graham Bishop, an expert in EU financial policy. "That would throttle economic growth."

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