Eurozone banks must raise a total of €115 billion by June in order to meet new Tier 1 capital requirements imposed by the European Banking Authority. So far, through a combination of shedding assets and making discounted rights offerings to existing shareholders, the banks have raised €40 billion, leaving €75 billion still to be raised.But the banks are also using another tool to raise the money. They have cut back on their lending and are hoarding cash, an unintended consequence of the new capital requirement. The injection of nearly half a trillion euros by the European Central Bank into the banking system last month was intended to encourage lending to get Europe’s economy going again. That’s not happening.
Even though banks may meet their reserve requirements by borrowing from the ECB, there’s little sign that any of the funds will be going toward jump-starting the continent’s lagging economy.
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