Easing bank capital rules won’t help EU energy crunch, says watchdog

By Huw Jones

LONDON (Reuters) -Loosening capital rules for banks would do little to ease a cash crunch among energy companies due to high gas prices, and risked making lenders less resilient to shocks, the European Union’s banking watchdog said on Thursday.

The European Banking Authority was asked by the bloc’s executive European Commission for its views on current levels of volatility and cash stumped up by energy firms in derivatives markets in case contracts turn sour, and how the banking sector could help.

Among the ideas aired in recent weeks is for the greater use of bank guarantees instead of cash as margin on derivatives positions of energy companies, but they are subject to capital requirements like loans.

“The EBA is, on balance, of the view that at the current juncture relaxation of prudential standards could have unintended consequences and erode the soundness and risk sensitivity of the regulation,” the watchdog said in a letter to the EU executive published on its website.

“The EBA view is that the prudential framework is built for normal, as well as more challenging times such as the current situation and overall is working as designed.”

There are no indications that capital rules are materially limiting the ability of banks to support energy firms, it added.

In March this year, EU banks held exposures to commodity derivatives worth 1.5 trillion euros ($1.47 trillion) or 6% of their total assets, with energy derivatives accounting for more than 40% of the total.

EU lenders had around 320 billion euros in outstanding loans and advances to electricity, gas, steam and air conditioning companies that month, EBA said.

Banks are already providing “significant levels of support” to energy firms by facilitating the posting of collateral at clearing houses, EBA said.

“Banks will likely continue to do so, but given the support already provided, additional bank capacity will likely be more limited should the levels of market stress in energy derivatives exceed those observed in August,” EBA added.

($1 = 1.0211 euros)

(Reporting by Huw Jones; Editing by Alex Richardson and Elaine Hardcastle)