Bank capital rules squeeze lending, lobby warns

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EU business lobbyists have launched a campaign to allow small investors like venture capital funds to operate across borders as bank lending threatens to dry up. 

BusinessEurope, the corporate lobby, has written to the European Commission demanding an EU passport for funds seeking to raise capital across borders as they argue that new rules for higher amounts of capital on banks' books will squeeze lending to start-ups.

In Europe, companies, and especially SMEs, depend mostly on national bank lending to access finance. 

"Lots of national rules restrict small funds to the member states they are in. Usually they cannot market their funds in other countries," Erik Berggren from BusinessEurope told EURACTIV.

In a letter to the EU commissioner for finance, Michel Barnier, BusinessEurope argues in favour of a passport which includes all small investors, because businesses will struggle to get money from banks that have been asked treble the amount of tangible assets on their books.

"The scope of such a proposal should be broad to include both venture and enterprise capital funds and also other investors such as 'business angels', high net worth individuals, and family offices as these are an important part of the investor base of small funds," reads the letter sent yesterday (16 August).

Overall, banks will need to raise about €423 billion by 2019 to comply with Basel III and the Capital Requirements Directive (CRD) IV, according to a draft proposal released in July.

Not only sovereign debt

BusinessEurope also argues that banks are still putting more faith into sovereign debt than company equity in spite of a run on many European countries' rising public debts.

Sovereign debt is typically less risky as countries have in the past managed to repay their debts earlier than the private sector. The current sovereign debt crisis, however, also puts a question mark over governments' reliability.  

The tougher capital rules were put in place as it emerged during the crisis that many lenders held more borrowed and toxic assets on their books than actual capital.

Entrepreneurs and start-ups are still suffering from the crisis as venture capitalists and other small investors rein in their spending.

Venture capitalists usually put money into young companies, seeking profit later when the start-ups go public or are bought by larger companies.

The Capital Requirements Directive (CRD), adopted in 2006, is currently undergoing its fourth review at the European Commission (EURACTIV 01/03/10). The rules would enforce proposals under discussion by the Basel Committee for Banking Supervision, which sets minimum standards for banks in 27 countries and includes global standard setters like Ben Bernanke, chairman of the Federal Reserve.

Germany has been the only member of the Basel Committee, which gathers banking supervisors and central bankers, to refuse to endorse draft rules on new minimum levels of capital which banks will have to hold.

Meanwhile, on 7 July 2010, the European Parliament adopted the EU's third round of revisions to the CRD. The EU's finance ministers approved the Parliament's text in October 2010, bringing the legislative process on CRD III to a close. 

CRD III requires banks to adopt new policies on the structure, amount and timing of bonus payments to prevent traders from underwriting risky deals in order to boost their salaries.  

The new principles even go beyond the recommendations of the G20's Financial Stability Board, because they impose limits on cash bonuses, require a partial deferral of bonuses and place a cap on their amount relative to fixed salaries.

Last month, the EU announced a fourth revision of the bloc's Capital Requirements Directive after the European Parliament approved CRD III early this summer.

Under the new Basel framework, which will be transposed into EU law under the fourth Capital Requirements Directive, banks will have to treble the amount of concrete capital on their books.

 

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