EU watchdog says bank capital cut has not sparked more lending

LONDON (Reuters) - A cut in capital charges on bank loans to smaller companies has not sparked more lending to boost the economy, the European Union’s banking watchdog said on Wednesday.

The findings undermine calls from banks to cut capital charges so they can lend more, and back policymakers who argue that well capitalized banks lend more.

Banks have been required to hold far more capital after the 2007-09 financial crisis forced governments to bail out lenders,

Due to fears that this could prompt lenders to rein in lending to an already stressed economy, the EU allowed banks from January 2014 to hold less capital against loans to smaller firms, known as an SME supporting factor or SME SF.

The watchdog estimates that as of the third quarter of 2015, bank capital was reduced by a total of 11.7 billion euros by the SME SF, with 60 percent of this in Italy, France and Spain.

But there is “no sufficient evidence” that lower capital charges provided additional stimulus for lending to SMEs compared to large corporates, the EBA said in a statement.

“Based on the empirical evidence available to the EBA, the SME SF has not led to increased lending at this stage,” the EBA said.

More data was needed to reach “strong EU-wide” conclusions, such as whether the cut should be reversed to bolster a bank’s soundness, it added.

Small companies are the backbone of the EU economy and rely mostly on banks for funds.

The bloc is trying to increase the amount of funding from stock and bond markets under plans known as the capital markets union, but could take years.

After the financial crisis, bank lending to SMEs tumbled from a peak of 95 billion euros in mid-2008 to 54 billion euros in 2013-14, and has remained below pre-crisis levels, the EBA said.

Bank lending to big companies has, however, already recovered to pre-crisis levels.

“The EBA supervisory data shows that better capitalized banks lend more to both SME and other borrowers,” EBA said.

“At the same time, banks with higher shares of SME or large firm non-performing loans lend less to that group of borrowers,” it added.

Reporting by Huw Jones; Editing by Elaine Hardcastle