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Breaks on lending to address socially desirable initiatives such as green finance were 'myopic, feckless and piecemeal', according to a former regulator © iStock

The former head of the Basel committee of international banking regulators has hit out at bank lobbyists who argue for weaker rules so they can lend to green causes or small companies.

As domestic regulators begin to implement the latest set of Basel rules, Bill Coen has warned against reducing the amount of capital banks have to hold in an effort to stimulate bank lending to certain types of companies.

In a letter to the Financial Times, Mr Coen writes: “Capital is often mischievously portrayed as being ‘locked up’ to convey the image that there is a large stash of cash a bank is required by regulators to keep in the vault instead of accurately referring to capital as a means for a bank to fund its investments and operations.

“The myopic, feckless and piecemeal attempt to address socially desirable initiatives, such as green finance and [small and medium-sized enterprise] lending, via bank capital regulation risks thwarting the [Basel committee’s] progress in improving minimum global standards. This approach is ineffective and, in the longer term, dangerous.”

Mr Coen stood down as secretary-general of the Basel committee earlier this year after working there for more than 10 years, during which time he helped craft the rules put in place following the financial crisis.

His intervention comes as regulators in the US and Europe begin instituting the local laws needed to ensure their banks comply with the most recent capital standards agreed at Basel, dubbed Basel IV by the industry. The rules are meant to ensure that bank across the world have certain minimum levels of capital and are better able to withstand another crash.

The US is still in the early stages of writing the rules that will turn the Basel standards into law. But Randal Quarles, the head of banking supervision at the US Federal Reserve, has already said he does not want American banks as a whole to have to hold more capital as a result.

Mr Quarles told a Congressional committee last week: “I do think that there are a few principles that we will need to keep in mind as we consider the implementation of the remainder of Basel III. And those principles are that we will maintain the current level of loss absorbency with the industry.”

That prompted criticism from some international officials, who are concerned regulators appointed by US president Donald Trump are soft-pedalling their rollout of the Basel rules in an attempt to protect the country’s banks and keep growth high as the next election approaches.

One senior European central banker called Mr Quarles’ comments “worrying”. A senior international policymaker added: “This is all very concerning. It will be really difficult to get these rules implemented in legislation on both sides of the Atlantic.”

Others, however, say the bigger implementation problems are on the other side of the Atlantic, where some European policymakers are keen to prop up their banking industry.

Earlier this year, the EU granted banks a significant concession when it said it would allow them to fill a greater portion of their so-called Pillar 2 capital requirements with cheaper forms of loss-absorbing debt known as AT1 and Tier 2. Analysts at Morgan Stanley estimate that the move should ensure European banks have to hold on average 0.9 percentage points less in core equity.

Jean Pierre Mustier, the chief executive of the Italian bank UniCredit, told the FT: “Regulation, step by step, is going to potentially stop the increase of capital requirements . . . which is very good news for the sector.”

Some experts believe that there is a risk of a race to the bottom as individual regulators look for the least onerous way to interpret the Basel rules.

Speaking on the FT’s Banking Weekly podcast, Harald Benink, professor of banking and finance at Tilburg University in the Netherlands, said: “Given the fact that we are still far below historical levels of capital, this is not the right time to stop raising equity capital.”

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