x Abu Dhabi, UAESunday 23 July 2017

G20 tells banks to raise capital

Euro Zone: The meeting of the Group of 20 (G20) nations in Cannes concludes, with an agreement to combat the problem of banks that are "too big to fail", but no resolution to the Greek sovereign debt crisis.

Mario Draghi, the European Central Bank president, says the new measures would markedly reduce the risks posed by systemically important financial institutions. Vincent Damourette / EPA
Mario Draghi, the European Central Bank president, says the new measures would markedly reduce the risks posed by systemically important financial institutions. Vincent Damourette / EPA

Banks considered "too big to fail" will be forced to raise funds as a buffer in the event of crisis as part of a new deal announced at the summit of the Group of 20 (G20) in Cannes.

The Financial Stability Board, the G20's financial monitoring body, has named 29 lenders that will be required to boost their capital ratios in an effort to protect taxpayers against footing the bill for future bailouts of the banking system.

Bank of America, HSBC, Lloyds Banking Group, UBS and Royal Bank of Scotland made the list, alongside BNP Paribas, Deutsche Bank and Credit Suisse.

No Middle Eastern banks were listed among the lenders considered "too big to fail", but economists warned that they could struggle to raise funding from European lenders because of the new requirements.

Mario Draghi, the outgoing chairman of the Financial Stability Board, said in a letter to leaders of G20 nations that the reforms aimed to prevent a repeat of the government bailouts that have marked the current financial crisis.

The new measures would "markedly reduce the risks posed by systemically important financial institutions", he wrote.

"These include policies to address distress and failure at such firms without disruption to the financial system and without taxpayer support."

Mr Draghi took the helm as president of the European Central Bank last week.

Bailouts of lenders that loaded up on risky debts before the financial crisis have left western governments facing huge bills and austerity measures to contain spiralling budget deficits.

The agreement requires banks deemed crucial to the smooth functioning of the financial system to take on an additional layer of high-quality capital, amounting to an extra 2.5 per cent of risk-weighted assets.

But the impact of financial-sector reforms would worsen the current crisis among European lenders and pose difficulties for Gulf banks attempting to attract financing from international banks, said Mark McFarland, an economist at Emirates NBD.

"It's going to mean that the … raising of capital by European banks is going to become more difficult. It's also going to mean more demand for capital from sovereign wealth funds here in the Middle East," he said.

But by focusing on reforms to the banking sector, governments had done nothing to resolve the current Greek crisis and may have made matters worse by reducing cash available for lending, Mr McFarland said.

"Do we have to have the complete collapse of the euro zone for European leaders to do something meaningful?" he said.

"We've got to the stage now where Greece is on the absolute brink of default and G20 leaders are still doing nothing."

On Friday, the yield on Italian 10-year government bonds soared to 6.37 per cent, a euro-era high and close to the tipping point of 7 per cent at which Portugal, Greece and Ireland were forced to seek bailouts from the IMF.

Higher bond yields make borrowing more costly for the governments issuing the bonds.

Italy has requested monitors from the IMF but has not requested financial aid.

ghunter@thenational.ae

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