UPDATE 1-Banks’ support exit needs to be timely-Bini Smaghi

* Premature withdrawal of support could undermine recovery

* Banks must be stopped from making prolonged use of support

* Planned Basel rules having restrictive effect on lending

(Adds details from speech)

MILAN, Jan 29 (BestGrowthStock) – The support measures put in place
by governments and central banks to help the banking system are
becoming less necessary but withdrawal must be timely, European
Central Bank Executive Board member Lorenzo Bini Smaghi said on
Friday.

In a speech on bank lending, Bini Smaghi also said banks
were interpreting a global regulatory overhaul in ways that
restricted lending, and that he was worried about criticism in
the United States of the Federal Reserve.

“It is crucial to prevent the banking system making
prolonged use of support measures, developing a sort of
‘dependence’,” he said, but added that premature withdrawal of
support measures could sharply reduce financial gearing putting
economic recovery at risk.

The need for banks to rebuild their capital bases under
Basel 3 regulations is starting to affect bank lending decisions
which is a worrying trend, Bini Smaghi said.

“It shows that the banking system is interpreting the new
rules in a restrictive way for lending,” he said.

Lending to the corporate sector can be expected to remain
“moderate” even in the early stages of recovery. He said it is
not easy to refute the fact that low interest rates helped fuel
credit demand before the crisis.

Bini Smaghi said U.S. President Barack Obama’s proposals for
the banking sector went in the right direction but needed
further measures.

He said the whole of the financial system, and not just
traditional banking activity, needed to be subject to
regulation, including hedge funds and investment banks.

The regulatory authorities also needed to be strengthened,
especially as regards their independence.

“The debate under way in the U.S. where the most independent
institution, the Federal Reserve, is subjected to attacks and
pressures from different parts … aimed at reducing its powers,
is worrying,” he said.

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(Reporting by Stephen Jewkes; Editing by Ruth Pitchford)

UPDATE 1-Banks’ support exit needs to be timely-Bini Smaghi