PARIS (Reuters) - France’s financial stability council ordered banks on Monday to hold extra capital in case a current lending boom turns to bust in the future.
The council, which includes the finance minister and the central bank governor, gave banks operating in France a year to build up a counter-cyclical capital buffer equal to 0.5 percent of their risk-weighted assets in France.
A source close to the council said that French banks were not expected to need to raise extra capital on the markets to meet the new requirement.
The council already imposed a counter-cyclical buffer for the first time last June, setting a rate of 0.25 percent in the face of strong credit growth.
But loan demand has shown no sign of slowing since then as French companies have continued to binge on cheap debt, with growth in bank lending to non-financial companies running at six percent over one year in January, according to the central bank.
That is among the fastest rates of loan growth in the euro zone, and far faster than economic growth, which the central bank forecasts at 1.4 percent this year.
As a result, corporate debt has steadily climbed to 74 percent of gross domestic product while strong mortgage borrowing has pushed household debt to 59 percent of GDP.
While banks generally frown on being required to hold extra capital, the buffer is aimed at ensuring they can keep lending if the credit cycle takes a turn for the worse.
In a downturn, the council can allow banks to release the extra capital so that they can keep lending when the economy needs it most.
Reporting by Leigh Thomas and Myriam Rivet; Editing by Geert De Clercq