There are two obvious ways for banks to bolster their capital positions: raise more by asking shareholders (or governments) to buy more of their shares or shrink the size of their balance sheets so their capital position strengthens as they shrink in size.Amid the ongoing talks in the eurozone about the need to recapitalise banks – to the tune of €100bn to €400bn depending on the analyst – a lobby group in Brussels is concerned that banks will do the latter, rather then the former, to boost their capital.
Finance Watch, set up to counterbalance the lobbying efforts of banks, has written to José Manuel Barroso, European commission president, to argue that banks should not be allowed to shrink at the expense of lending to economies across Europe.
The letter, signed by Thierry Philipponnat, secretary general of Finance Watch, says:
We call on the heads of state and government to ensure that national and European bank supervisors have adequate means to supervise the deleveraging process of banks, in order to prevent further restrictions on the supply of credit to the real economy.
Should deleveraging by universal banks end up harming the real economy, that would, in our view, raise again fundamental questions about the very concept of 'universal banking' and its relationship with the real economy.
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