January 07, 2013

A decision by global regulators to give banks more time and flexibility to build cash reserves will not boost lending or speed recovery in debt-strapped Europe, where firms and households have scant appetite to borrow.

In the United States, where the economy appears to be rebounding, the rules could loosen credit a bit and could help revive mortgage securitization. But any boost to the U.S. housing market would be mostly psychological.

On Sunday, the Basel Committee gave banks four more years to build a backstop against future financial shocks and allowed a wider range of assets, including stocks, residential mortgage-backed securities and lower-rated corporate bonds.

An earlier draft of these global liquidity rules, designed to help prevent future banking crises, was more stringent. The more relaxed regime means lenders will in theory have more scope to use some reserves to help struggling economies grow.

The changes "will make it easier in the future to lend to companies than the originally planned rules did," said Bank Austria, the UniCredit unit that is the biggest lender to Europe's developing economies.

But for the euro zone economy, which the European Central Bank suggests will shrink 0.3 percent this year, easing banks' ability to lend cannot compensate for the dearth of demand for loans among wary consumers and businesses.

"Overall it is positive, but I don't think it is enough to turn around the whole situation in the short-run," Berenberg Bank economist Christian Schulz said of the Basel rules change.

He said the effect on the 17 countries that use the euro would amount to just 0.1-0.2 percentage points of annual output.

The ECB has struggled to boost lending. It channelled more than 1 trillion euros of cheap, three-year loans to banks early last year, saying this helped avert a major credit crunch.

But demand remains the real problem.

A recent ECB survey showed euro zone banks made it harder for firms to borrow in the third quarter and expected to toughen loan requirements further even though their own funding woes had eased.

By far the most important reason banks cited for tightening credit standards for firms was the economic outlook. Household lending was hurt by worries about the housing market's health.

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