Leading global banks warned the Group of 20 major economies Wednesday that demands for higher capital levels could push Europe's economies back toward recession.
In a letter to the G20 leaders, meeting in Cannes, France, Thursday and Friday, the Institute of International Finance, which represents hundreds of major banks worldwide, said recapitalization plans for Europe's banks would cause "a number of serious problems" in a region still mired in crisis.
Banks are already weighed down by their holdings of debt of financially weak eurozone countries like Greece, Italy and Portugal, the IIF said.
Moreover, banks are unlikely to raise new capital in current market conditions, with bank shares trading at half their book value and the cost of new debt issues some two percentage points higher than a year ago, it said.
Against that backdrop, it is inevitable that many European banks will shrink risk assets -- cut lending -- rather than try to raise expensive capital or accept forced capital injections, the IIF said.
"This will add to the financial sector deleveraging and contractionary pressures already evident in Europe."
The IIF said that if banks resort only to tapping earnings and cutting their risk assets to strengthen capital under targets for next year, that could mean cutting their euro-area loan exposure by five percent, effectively crunching credit to all borrowers.
The banks warned that the broader global efforts for a tougher capital regimen "seem increasingly to be detached from the negative effect that they are having on the economic and financial market outlook."
"Neither bank capital nor long-term funding can be raised in the quantities implied by the totality of current requirements without significant cost implications," tightening the supply and raising the cost of credit.
"With unemployment in the euro area now at over 16 million -- an increase of over half a million in the past six months and nearly 5 million from pre-crisis levels -- this is a very pressing concern."