Wednesday, March 28, 2012

Regulators' 9% Tier I capital target induced credit crunch trumps ECB's LTRO

The Telegraph reports that the financial regulators' 9% Tier I capital target induced credit crunch trumps the ECB's LTRO program.

European banks cut lending lines to companies last month, defying the central bank's grand plan to stem the crisis with a flood of more than €1 trillion (£838bn) of cheap loans.
As predicted on this blog, requiring banks to achieve a meaningless 9% Tier I capital ratio would cause a severe contraction in credit across the Eurozone.

Furthermore, the 9% Tier I capital ratio is doing nothing to restore confidence in the Eurozone banks.  Without ultra transparency where banks disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, market participants cannot tell which banks are solvent and which are not.

As a result, the interbank lending market is frozen and the on-going run on the Eurozone banks continues to reduce their deposit base.

The European Central Bank (ECB) said loans to the real economy fell in February, scotching claims that radical long-term refinancing operation (LTRO) would stem the crisis. 
Open Europe's Raoul Ruparel said: "The LTRO has succeeded in avoiding a severe funding crunch...[But] it does not tackle the underlying lending risks which the banks are still keen to avoid, particularly with the looming recession in Europe." 
As Spain faces a general strike on Thursday, economists called for the eurozone to use its bail-out funds to support the country's banks. 
Finance ministers are under pressure to boost Europe's "firewalls".... 
But Jens Weidmann, Bundesbank president, warned that "just like the 'Tower of Babel' the 'Wall of Money' will never reach heaven". 
Italy's premier Mario Monti warned against blaming sinner states: "It was in fact Germany and France that were loose concerning the public deficits and debts," he said. "If the father and mother of the eurozone are violating the rules, you could not expect...[others] to be compliant."

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