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Financial crisis fallout Banks choosing more capital over less credit

Five years ago, Wall Street traders could only watch as the markets plummeted


Five years after the global economic crisis began, a study by the Basel-based Bank for International Settlements has found that despite stricter rules, banks have barely reigned in the credit they are doling out, bolstering capital instead.

The Basel III accord stipulating capital and credit requirements set to take effect in 2019 is already having an impact on banks, according to the study - the largest banks increased their capital by 34 per cent and their capital ratios (the amount of capital a bank holds versus its risk) from 5.7 to 8.5 per cent between 2009 and 2012.

Those numbers indicate that the 82 banks studied have so far largely chosen to bolster their capital instead of cutting credit to meet new requirements – in fact, on average, financial institutions issued more credit than before the crisis. However, credit growth in Europe has been tempered since the crisis and financial institutions have increasingly pulled back from risky markets and investments.

Critics have repeatedly warned that a systematic pull-back from issuing credit in order to bring down capital ratios could hurt economic growth.

The study also found that in some parts of the world, such as southern Europe, banks aren’t necessarily passing on historically low interest rates to their customers, resulting in significant bank profits. In places like the US and Germany, the difference between interest rates and lending rates is less extreme, though it has returned to its pre-crisis levels.

Among the 82 banks studied by the Bank for International Settlements are 26 of the 28 institutions considered to have a significant influence on the global financial markets. and agencies

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