ECB policy, stress tests weighing on bank credit: BBVA

MADRID Mon Apr 28, 2014 1:34am EDT

Two women walk past a BBVA bank branch in Madrid October 11, 2013. REUTERS/Juan Medina

Two women walk past a BBVA bank branch in Madrid October 11, 2013.

Credit: Reuters/Juan Medina

MADRID (Reuters) - Uncertainty over the European Central Bank's policy plans to deal with weak inflation and the Europe-wide banking health checks this year are hampering a revival of lending in the region, a top executive at Spain's BBVA (BBVA.MC) said.

Jose Manuel Gonzalez-Paramo, an executive board member at the number-two Spanish bank, also warned that there were signs that national regulators were increasingly driving elements of financial rule-making, creating another drag on lending as banks faced varying demands across regions to bolster their reserves.

Shrinking bank credit across Europe, triggered in part by lenders cutting risks on their balance sheet in the wake of the 2007-08 global crisis, has curtailed on the region's economic recovery.

One key uncertainty now hanging over lending was whether the ECB would print money to buy assets if faced with a long period of low inflation, according to Gonzalez-Paramo, who was on the ECB's executive board from 2004 to 2012.

"We don't know what concrete plans the ECB is considering in the event that in several months it decides to undertake quantitative easing or similar non-conventional measures," Paramo said in an interview as part of the Reuters Financial Regulation summit.

Euro zone inflation has slipped in recent months, falling to 0.5 percent in March, the lowest since November 2009 and under the ECB's preferred target of below but close to 2 percent.

"Whether one or the other will be adopted is fundamental for credit," he said. Some banks were also cautious and holding back on new credit plans before the health checks, he said.

The results of those are due around October, though banks found to have serious shortfalls will have to disclose them immediately, as soon as May or June. The ECB is carrying out the euro zone tests, in co-ordination with the EU-wide tests run by the European banking Authority, before it takes over as the euro zone's banking supervisor in November.

Global bank lending fell for the seventh straight quarter in the last three months of 2013, according to data from the Bank for International Settlements last week.

Gonzalez-Paramo, a Spanish economist who joined BBVA last year and is the director in charge of regulation, said improving growth prospects across Europe and clarity over some rules, such as global Basel III capital regulations that are now in place in the region, were among some positives for credit trends.

Spain, for instance, exited recession in the second half of last year, and the government forecasts the economy will grow 1 percent in 2014. Some of BBVA's smaller peers reported this week their bad debts were falling and forecast the start of an earnings turnaround after a deep crisis.

RENATIONALISATION

But Gonzalez-Paramo, who has also previously sat on the Bank of Spain's executive commission, warned that some further regulatory changes could be harmful to economies, in part as rule-making took on a political dimension and local regulators tried to take back control.

"The worst possible consequence of a process of re-nationalization (of regulation) is that it could create a ring-fencing of financial businesses," he said.

"We are detecting some trends that are moving in this direction. National regulators want to have a hand in what happens in their territory, notwithstanding the global nature of the business."

Gonzalez-Paramo said this would shrink the amount of funds available for the real economy and make them more expensive.

"We would all lose," he said.

Europe is trying to counter a fragmentation of regulation across countries by moving towards a banking union and with major EU-wide reforms, including agreements on how to wind failing banks down without public money. <ID:L6N0N617C>

But regions such as Europe and the United States are applying general principles of global regulations with local variations, Gonzalez-Paramo said.

Many banks with operations across these areas have complained they face differing demands, but which broadly push them to build up bigger buffers to face up to future crises.

"There are regulatory dynamics that have left the financial sphere and have gone to being propelled basically from the political sphere. And we should reflect about that," Gonzalez-Paramo said.

The BBVA executive cited plans for a financial transaction tax in Europe as a possible example, adding credit could become more expensive as an unintended side effect of such a measure. The planned tax on stocks, bonds, and derivative trades is being backed by 11 euro zone countries, including Spain.

"First we should be clear about what we want to get out of it ...," he said. "Generally the revenue is very small and the distortions created by financial transaction taxes are very big."

BBVA, alongside 15 Spanish peers, is among euro zone banks that will undergo a review of its assets by the ECB this year, as well as a later EU-wide stress test.

Gonzalez-Paramo said the country's lenders, which are recovering from a six-year property-market crash that led some into bailouts, should broadly hold up well after bolstering their protection against losses in recent years.

"I don't rule out that here or there in corners of the system some weak points may surface, but in any case not dramatic ones, as otherwise they would have already been identified," he said. "Therefore, these would be problems that entities could deal with, with relatively little effort." (For other news from Reuters Financial Regulation Summit, click here) Follow Reuters Summits on Twitter @Reuters_Summits

(Editing by Laura Noonan, Larry King)