EU rules lock up $4.9 trillion in loans, says lobby report

Bloomberg

Europe could boost bank lending by as much as €4.5 trillion ($4.9 trillion) by lightening the industry’s regulatory burden, according to a study commissioned by the region’s banking lobby.
That increase of almost 30% would stem from bringing demands for European banks’ capital reserves and related costs more in line with those of US competitors, consultant Oliver Wyman found in a report for the European Banking Federation (EBF).
European banks have long pushed for an easier ride from regulators, arguing that their balance sheets and profits could be better deployed to support growth in an economy that’s more dependent on bank lending than the US. Despite recent wins for the industry as EU lawmakers seek to water down a planned update to capital rules, the lenders are keeping up their lobbying efforts with the frustration of some with the European Central Bank (ECB) spilling into the open last year.
Regulators have responded, saying the industry was able to weather the pandemic and keep lending thanks in large part to the capital banks were forced to build up since the 2008 financial crisis. Several lenders have since pledged to return billions of euros to investors via dividends and share buybacks.
It’s “questionable” whether lower capital requirements would lead to higher lending, according to a spokesman for the European Central Bank, which oversees banks in the euro area. “What is proven is that low levels of capital lead banks to abruptly reduce lending in a crisis, thus deepening the adverse impact on the economy,” the spokesman said in an emailed statement.
Besides more onerous capital requirements, European banks also face higher relative levies for funds intended to protect depositors in case a lender needs to be shut down, according to the study. “EU banks also face higher operating costs resulting from regulation due to more burdensome compliance and supervisory requirements than in the US,” Oliver Wyman said.
“It’s so easy to blame regulation and supervision to be too burdensome and say that’s why the European banks are not as profitable as US banks,” Kerstin af Jochnick, a member of the ECB’s Supervisory Board said at a conference in Frankfurt. The ECB works with US authorities “and we also compare regulation and supervision and I would say for the larger European banks, it’s not really a difference compared with the US banks, so I think that is not
really the problem.”
The additional funding would exceed the financing that small and medium-sized companies need to pursue Europe’s goals of transforming its economy into one that is environmentally sustainable and makes good use of digital technology, according to the study.
Still, there’s no guarantee that banks would meet that new lending potential. Policy makers would also have to help make companies more competitive and the credit would have to be assessed against “the economy’s ability to absorb additional funding without a marked increase in banks’ risk profiles,” Oliver Wyman said.
The ECB said it disagrees that European banks are at a regulatory or supervisory disadvantage to US banks. Still, some of the issues in the report support its positions on the lack of progress on banking union in Europe and the need for lenders to be more efficient and enhance their digital capabilities, according to the spokesman.
“On supervisory processes mentioned in the report, we are open to continue discussing with the industry on how we can further improve,” he said in an emailed statement.