Friday, January 30, 2009

Trichet warns on capital hoarding

Jean-Claude Trichet gave a stark warning to financial markets on Thursday to stop putting pressure on banks to hold more capital, insisting that such views were exacerbating the global recession.

The president of the European Central Bank criticised the prevailing view among investors that banks should hoard funds, insisting that the view was contrary to those of the European authorities. Such ideas did nothing to contain the deepening recession, he said, and also provided non-financial companies with incentives to postpone investment.

Mr Trichet’s comments at the World Economic Forum in Davos, came as leading bankers and policymakers also warned on Thursday that the wave of bank bail-outs in Europe and the US could usher in a new era of financial protectionism that could lead to a deeper global economic slump.

Asked by Josef Ackermann, chief executive of Deutsche Bank, whether the markets were right to press banks to hold more capital, the ECB president insisted three times that “what the markets are suggesting is not appropriate”.

It was “very important as far as the authorities are concerned”, he added, that the route forward was “not in line with the ideas that [banks] should now augment capital ratios”.

In the turmoil that followed the collapse of Lehman Brothers last September, investors have increasingly punished those banks with relatively low capital ratios, thereby encouraging them to hoard capital rather than expand their loan books.

Mr Trichet said it was now up to companies and markets to do their bit by resuming normal business practices and regain some of their lost confidence. Private companies were becoming too short-termist in their outlook and fear of investment, he said and “have to get back to a normal horizon of investment”.

Mr Trichet’s message of support for bank lending and business investment came at a time of increasing political pressure on banks to shrink their business overseas while maintaining lending to domestic consumers and companies, which has contributed to a sharp drop in international capital flows.

Bankers warned on Thursday that this trend was a creeping form of protectionism that could plunge the world into a deeper economic slump.

“One lesson we must learn is that we can not turn the clock back (in finance),” said Stephen Green, chairman of HSBC, the global bank which has extensive operations in Asia.

“If we do, the casualties will be emerging markets which depend on international capital movements.”
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