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Risk-Averse European Banks May Prompt Credit Crunch: Watchdog [LIVE UPDATES]

12/11/2011 11:26 am ET | Updated Dec 11, 2011

FRANKFURT - The European Banking Authority (EBA) has warned lenders against being so risk-averse as to prompt a credit crunch.

It also said regulators would not allow a cut in lending as a means to meeting regulatory capital targets.

Banks have changed their behavior far more than the public has realized in the wake of the financial crisis, EBA head Andrea Enria told German magazine Der Spiegel in an interview.

"At the moment, our concerns have gone to the other extreme: that we could now have the problem banks are too risk-averse, which could ultimately lead to a severe credit crunch," Enria said in the interview in the magazine's Monday edition.

Lenders around Europe will need to drum up about 115 billion euros ($154 billion) in extra capital by June 30 to meet a regulatory capital target set by the watchdog.

Banks can retain earnings, curb dividends and bonuses, sell off chunks of their businesses or reduce risky assets to meet the target, but Enria put them on guard if they were thinking of choking off loans.

"If a bank reduces its lending to small and medium-sized enterprises, it won't be counted (toward meeting the target)," he said. "We will not allow credit supply to be cut."

Banks have until January 20 to present their roadmaps for meeting the regulatory capital target to banking supervisors.

Loan portfolios can be sold, even to hedge funds, to help bolster banks' equity capital cushions, Enria said.

The EBA wants banks to reach a core Tier 1 regulatory capital ratio of 9 percent by the mid-2012 deadline, which should help lenders withstand any market deterioration.

The watchdog's stress tests of banks, based on data from the third quarter, revealed six German lenders need 13.1 billion euros of extra capital to meet the deadline, nearly triple the amount estimated previously.

Commerzbank (CBKG.DE) needs 5.3 billion euros and Deutsche Bank (DBKGn.DE) 3.2 billion, with four other public-sector or co-operative lenders -- NordLB, Helaba, DZ Bank and WestLB -- making up the remainder.

"These sorts of high figures do not necessarily mean that banks are in bad shape," Enria said.

"The most urgent problem is funding, and in that regard the German banks are doing better than others. However, the storm is also affecting them, and they, too, have to strengthen their capital."

Only a few large banks have been able to fund their businesses since July, and have had to pay very high interest rates to do so, Enria said.

"If banks cannot get funds, they stop lending and that damages the economy," he said. "We are stuck in a vicious circle and we have to try to break out of it."

($1 = 0.7482 euros)

(Reporting by Jonathan Gould; Editing by David Hulmes)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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13/12/2011 15:17 GMT

State Bailouts For European Banks May Be Necessary, Spurring 'Vicious Cycle': Report

Banks that need to raise extra capital to meet the European Banking Authority's capital requirements may need to turn to their governments for help, and that could spur a vicious cycle of rising borrowing costs for European governments and increasing strains on banks, Bloomberg News reported on Sunday.

The European Banking Authority ordered banks in the European Union last week to raise $154 billion in new capital by June of 2012. But not all banks may be able to meet those requirements, especially since 70 percent of banks that need to raise new capital reside in countries that are in danger of default, according to Bloomberg. If governments aid their banks, then investors would lose more faith in those countries' abilities to pay their debts and demand higher interest rates, which would further trouble banks' balance sheets.

"If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems," Karel Lannoo, chief executive of the Centre for European Policy Studies in Brussels, told Bloomberg. "Then the banks' losses will rise because they hold the government debt. That’s a vicious cycle. It's hard to know which one to stabilize first, the sovereign bonds or the banks."

--Bonnie Kavoussi

12/12/2011 23:24 GMT

Market Panic Hurting European Economy: Fitch Ratings Director

Gergely Kiss, director at Fitch Ratings, said in an interview with The Huffington Post that "financial tension" in Europe is "feeding slowly into the real economy."

"There is the fear that this will have an impact on domestic demand," he said.

Fitch Ratings released a report today forecasting that the eurozone economy would grow 0.4 percent in 2012, with growth slowing throughout the year.

--Bonnie Kavoussi

12/12/2011 23:16 GMT

German Bank In Talks With Government About Possible Bailout: Report

The German bank Commerzbank is in talks with the German government about the possibility of obtaining a bailout, Reuters reports.

Commerzbank, the country's second-largest ban has said that it wants to avoid a bailout but still needs to raise $7 billion in capital by the summer of 2012 to meet the European Banking Authority's requirements, according to Reuters. Commerzbank is 25 percent owned by Germany.

--Bonnie Kavoussi

12/12/2011 23:03 GMT

Niall Ferguson: Europe Could Cause Great Depression

Harvard historian Niall Ferguson wrote in a column on Friday that Europe is in danger of repeating the mistakes of the early 1930s, when the Great Depression became truly great. He wrote:

In the past few months, incompetent leadership has brought the euro-zone economy, and with it the world economy, to the edge of a precipice strongly reminiscent of 1931. Then, as now, it proved impossible to arrive at sane debt restructurings for overburdened sovereigns. Then, as now, bank failures threatened to bring about a complete economic collapse. Then, as now, an excessively rigid monetary system (then the gold standard, now the euro) served to worsen the situation....

The course on which the continent has now embarked means not just the creation of a federal Europe, but a chronically depressed federal Europe. The Eurocrats have exchanged a Stability and Growth Pact—which was honored only in the breach—for an Austerity and Contraction Pact they intend to stick to. The United Kingdom has no option but to dissociate itself from this collective suicide pact, even if it strongly increases the probability that we shall end up outside the EU altogether.

--Bonnie Kavoussi

12/12/2011 22:53 GMT

Hussman: European Debt Crisis Helps Cause 'Unusual Concern'

John Hussman, president of Hussman Investment Trust, wrote in a report on Monday that "the present market environment warrants unusual concern" largely because the European Central Bank is unlikely to come to the rescue in Europe. He wrote:

Read [Mario] Draghi's lips: the ECB will not be initiating massive purchases of distressed European debt unless and until the EU Treaties themselves are explicitly changed.... In effect, if a fiscal union is achieved without treaty changes, the ECB is unlikely to act. But even if treaty changes are achieved, the ECB is unlikely to act forcefully unless those changes are credible. Of course, if the changes are credible, then forceful actions will not be needed anyway. In any event, the problem for bailout-hungry investors is that they will be deeply disappointed if they expect Mario Draghi to turn into Ben Bernanke.

--Bonnie Kavoussi

12/12/2011 18:37 GMT

Paul Hockenos: A European German Has Become A German Europe

Author and political analyst Paul Hockenos writes in Foreign Policy that the European debt crisis includes Germany:

Also, there's yet another level of German hypocrisy in its holier-than-thou protestations concerning the poor periphery's debt. All of Europe is highly indebted and while the European-side of the transatlantic crisis opened on the shores of the Mediterranean, it is now an pan-European crisis -- and that includes Germany, one of the first countries to breach the Maastrict debt ceilings. According to I.M.F. numbers, gross government debt in Germany will be nearly 83 percent of gross domestic product by 2012.

Read the full article in Foreign Policy here.

12/12/2011 17:35 GMT

Why Should Teens Care About Euro Crisis?

Over on HuffPost High School blogger Devon Kerr has a good simple explainer on the crisis for teenagers. It's worth a look for anyone trying to figure out what's going on. Read it on HuffPost High School.

12/12/2011 17:30 GMT

U.S. Stocks Plunge

American stocks plunged on Monday as investors became increasingly fearful that the eurozone debt crisis did not reach a resolution at all at last week's summit for the European Union in Brussels. The Dow Jones Industrial Average fell 224.86 points as of 12:21 p.m. ET, and the S&P 500 fell 2.01 percent, according to Google Finance.

The U.S. stock market plunge, following a two-week rally, was due in part to Moody's Investors Service's announcement that it would review the credit ratings of all countries in the European Union, according to Bloomberg News.

"The European stopgap may not be successfully implemented," Stanley Nabi, vice chairman of Silvercrest Asset Management Group, told Bloomberg, referring to the deal reached last week. "In order for this program to be successful, there’s going to have to be a lot of belt tightening. That means that the European economy is not going to do well at all. That would have negative impact on other countries around the globe."

12/12/2011 17:26 GMT

Fitch Ratings Lowers Global Economic Growth Outlook

The credit ratings agency Fitch Ratings said in its global economic outlook report that it expects major advanced economies to grow just 1.2 percent in 2012, less than in 2011.

Fitch said that it expects growth in the eurozone to weaken to 0.4 percent in 2012 because of budget cuts across the continent and tighter credit. Fitch added it expects the economic output of Italy -- the eurozone's third largest economy, which investors fear could default on its debt -- to shrink 0.5 percent in 2012.

--Bonnie Kavoussi

12/12/2011 16:11 GMT

Munchau: Eurozone Faces 'Loss of Confidence'

Wolfgang Munchau, associate editor of The Financial Times, wrote in a column that the summit in Brussels last week was a failure, and that European leaders should have admitted it. He wrote:

The eurozone is facing a generalised loss of confidence. Investors no longer trust its crisis management, the solidarity of its citizens, even the ability to conduct sensible economic policies. The EU is not going to restore confidence through legal gimmickry that will face numerous court challenges....

Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support.

--Bonnie Kavoussi

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