Jan.07 - EU banks stocks hit a 17-month high on Monday after regulators backed down on strict liquidity rules in effort to boost growth. Ivor Bennett reports.
It was a reform that was supposed to show the banks who's boss - a liquidity standard all banks across Europe would have to meet. But what began as an aggressive clampdown, has suddenly gone soft. Industry regulator - the Basel committee - has relaxed an original plan for minimum cash reserves by giving banks more time and more flexibility. Despite the tough-talking, Michael Hewson from CMC markets says regulators would always have to back down. SOUNDBITE (English) CMC MARKETS SENIOR MARKET ANALYST MICHAEL HEWSON, SAYING "Unfortunately regulators are caught between, you know, a rock and a hard place. If they clampdown on banks then obviously they're going to strangle their ability to lend. And if they relax too much they're going to be accused of going soft on banks. Unfortunately the reality is, the economy needs banks to lend because essentially lending money is the life blood of growth." SOUNDBITE (English) REUTERS REPORTER IVOR BENNETT SAYING "It's the first time ever that banks across Europe will have to meet a target for a cash buffer. The hope is it'll prevent another global financial crisis, making banks less vulnerable to sudden runs. But the buffers will now not only be smaller than planned, they'll also be much easier to fill." Under the original draft, only government bonds and top-quality corporate bonds could form a cash buffer. and banks had to comply by 2015. But now they can use shares, some equities AND retail mortgage-backed securities too. Plus they've been given 4 more years. The industry complained the earlier deadline would stop them lending and choke a recovery. But Edward Hadas from Reuters Breakingviews doubts the new rules will mean any boost for growth. SOUNDBITE (English) REUTERS BREAKINGVIEWS ECONOMICS EDITOR, EDWARD HADAS, SAYING, "The main story of the last 4 years from a macro economic point of view is you keep easing policy and you keep policy at pretty extreme levels and not that much happens in the economy so this looks like more of the same. Give in to the financial system for the sake of the economy and hope for the best." It's good news for the banks at least. Europe's banking index hit a 17-month high on Monday with French, German, British and Italian lenders all rising. Whether it'll have the same effect on Europe's economy is another question altogether.