A top lobbyist for France's largest bank says Europeanlawmakers will have only themselves to blame if pressure to bolstercapital too quickly results in more Boeing Co. planes at theexpense of European rival Airbus SAS.

“In the case of the French banks, activities where theywere leaders like aircraft leasing or shipping financing will bepartly taken over by U.S. or Chinese banks,” Dominique Graber,co-head of BNP Paribas SA's public and prudential affairs, told theEuropean parliament's committee on economic and monetary affairs inBrussels on Oct. 11. “One will also not be surprised if later onmore Boeings than Airbuses get funded.”

European banks say they have to cut assets to help satisfya government push to boost capital faster than planned to insulatethem against the sovereign debt crisis. That may trigger a creditcrunch for companies and consumers throughout the 17-nation eurozone, helping to push its economy into recession, say CitigroupInc. and Deutsche Bank AG analysts.

Leaders meet today in Brussels to approve a plan toincrease lenders' capital by about 100 billion euros ($139billion). Banks say they will more likely achieve the newrequirements by shrinking rather than raising cash fromshareholders, a scenario they want to avoid partly because theirshare prices have fallen 30 percent this year.

Threats Are 'Pernicious'

“Threatening there will be fewer loans for Airbus aircraftis pernicious,” said Christophe Nijdam, an AlphaValue bank analystin Paris. “Aircraft leasing isn't a big amount in BNP Paribas'sbalance sheet, but imagine the impact of such a comment on Germanor French lawmakers with an Airbus plant in their constituencies.Banks have other ways to boost capital than reduce lending tobusinesses. They could cut their trading books forexample.”

Banks are using the threat of lower lending to influencetalks with regulators, just as demand for financing declines in aslower economy. Lenders reported a net decrease in loanapplications by non-financial firms in the third quarter, the firstdrop in more than a year, according to the European CentralBank.

“This whole tune sounds familiar, and it's always been thecase ahead of major recapitalization exercises that we see thesestatements of banks,” said Christian Gattiker, head of research atBank Julius Baer & Co. in Zurich.

Europe Versus U.S.

Banks are more important to the European economy than theyare in the U.S., according Bank of America Corp. economist LaurenceBoone. She calculates that loans to the private sector totaled 145percent of gross domestic product in 2007, more than double that ofthe U.S., where companies rely more on stock and bond markets forcapital.

James Ferguson, head of strategy at Arbuthnot SecuritiesLtd. in London, draws parallels between Europe's current situationand the credit crunches suffered in recent decades by Japan, theU.S. and the U.K.

“History shows that bank recapitalizations provide thecatalyst for the credit crunch,” he said in an Oct. 20 note. “Japanlearned this in 1998, and the U.S. and the U.K. in 2008.Continental Europe's lesson starts now.”

Banks across Europe have announced they will trim more than775 billion euros from their balance sheets in the next two yearsto reduce short-term funding needs and achieve the 9 percent inregulatory capital required by the Basel Committee on BankingSupervision ahead of schedule, according to data compiled byBloomberg. They may be required by policy makers today to meet thisratio by the end of June, two people with knowledge of the talkssaid.

'Incredibly Worrying'

So-called bank deleveraging could reach 5 trillion euros inthe next three to five years, according to Alberto Gallo, head ofEuropean credit strategy at Royal Bank of Scotland Group Plc inLondon.

“It is incredibly worrying that this wall of deleveragingwill, in fact, continue to add additional pressure onto theEuropean economies,” John Moran, head of bank restructuring atIreland's Finance Ministry, said in a speech in Dublin Oct. 12.There is “an absolute necessity to avoid excessively speedydeleveraging across the system.”

The ECB reported on Oct. 6 that the toughening of creditstandards by euro-zone banks “picked up significantly” in the thirdquarter. A net 16 percent of banks said they tightened loan termsto non-financial firms, compared with 2 percent in the previousthree months and predicted more constraint in the current quarter.Eighteen percent said they had done the same for consumers buyinghomes, double that of the second quarter.

Moving Toward Recession

The ECB's third-quarter data show the biggest restrictionof credit since the third quarter of 2009 and that loan officersare signaling it will get worse in the first quarter of next year,according to an analysis by Guillaume Menuet, a Citigroupeconomist.

Such constraint “will play a part” along with tighterfiscal policy in tipping the euro area into its second recession inthree years, Menuet said. He estimates the economy will contract0.3 percent in the current quarter before shrinking about 0.1percent in each of the next three quarters. The economy expanded0.2 percent in the second quarter from the previous three months,according to the most recent data.

“The recession has already started,” Eric Chaney, Axa SA'schief economist, said in an interview with Bloomberg Television inParis on Oct. 14. “There is a credit crunch. Banks are not lendingas much as companies would like, especially in peripheralcountries.”

Rates Rising

In Spain, one in four companies were rejected for loans in2010, compared with 10 percent in 2007, according to a survey bythe country's national statistics institute published in May. Theaverage interest rate on new company loans of as much as 1 millioneuros rose to 4.7 percent in July from 4.57 percent in June, and3.88 percent in December, the Bank of Spain reported.

The EU proposals “will produce a contraction of creditsince many institutions will opt to reduce their balances,” BancoSantander SA Chairman Emilio Botin said in a speech on Oct. 18 atthe bank's headquarters outside Madrid.

Santander expects lending at its Spanish branch network todrop 3 percent a year through 2013, it said in an analystpresentation in September.

In Ireland, 55 percent of loan applications by companiessucceeded last year, compared with 95 percent in 2007, according toa May survey by the country's Central Statistics Office.

France, Germany

Companies in countries at the heart of Europe, includingFrance and Germany, are facing more selective banks demanding moreexpensive terms. A net 28 percent of French corporate treasurersjudged it was “difficult” to get bank financing, according to anOctober survey by the French Association of Corporate Treasurers.In July, a net 1.4 percent of the respondents said it was“easy.”

“We're seeing a similar trend as in 2008 when thingssuddenly and massively deteriorated,” Richard Cordero, theassociation's head in Paris, said in an interview. “Banks arereducing their balance sheets, and it doesn't bode well in terms ofgetting access to credit.”

Airbus said Sept. 19 it's concerned the European debtcrisis may hurt airlines' ability to raise bank financing foraircraft purchases. Suppliers may also be hit, Airbus ChiefExecutive Officer Thomas Enders said at a conference lastweek.

“We see some troubling signs of lack of capital, especiallywith some of our smaller suppliers,” Enders, 52, said in Toulouse,France, on Oct. 18. “They're the ones who get hit first when bankstighten up their capital.”

Financing Alternatives

French banks provide 15 percent to 20 percent of commercialaircraft financing, according to Bertrand Grabowski, managingdirector of DVB Bank SE, which is among the biggest aircraftfinanciers in Europe. On Sept. 22, European Aeronautic, Defence& Space Co., Airbus's parent, sought to reassure investors thatother lenders could fill the gap if European banksretrench.

“We have seen many new banks entering or re-entering theaviation market,” EADS Chief Financial Officer Hans Peter Ring saidin an e-mailed statement then.

Regulators created a framework that makes businesses suchas aircraft leasing harder, BNP Paribas CEO Baudouin Prot said in aSept. 22 interview with French newspaper Les Echos.

“All the banks will have to adapt, notably in the marketsthat are far from their base,” Prot said. “We won't, however,abandon the expertise accumulated over decades in businesses thatare useful to the real economy.”

Societe Generale

Pascal Henisse, a spokesman for BNP Paribas in Paris,declined to comment further.

“We're going to continue to finance the French economy,”Societe Generale CEO Frederic Oudea, 48, said in an interview withFrench channel BFM TV on Oct. 24. He pointed out that the volume ofloans provided by the French banks to companies and households grew6 percent annually through August.

“If you give banks 18 months time to reach a certaincapital quota, then they'll try to reach that through a reductionin business,” Commerzbank AG CEO Martin Blessing, 48, said in aninterview with German newspaper Bild Zeitung on Oct. 21. “Thatwould hamper lending to companies.”

His comment echoed Deutsche Bank CEO Josef Ackermann, 63,who said on Oct. 13 that banks may be forced to restrict lending“due to possible debt haircuts in the euro zone.”

Regulators say the risk of reduced lending is worth takingin light of a bigger concern about the banks' ability to findshort-term funding on the markets at a time when investors arequestioning their sovereign debt holdings.

'Excessive Fear'

“It's a risk that exists,” French Central Bank GovernorChristian Noyer said in an interview on French channel TV5 Monde onOct. 16. “But the risk that's more important today is that thebanks are subject to excessive fear from investors making it hardfor them to find funding.”

The chances of a credit crunch would also shift “higherthan 50 percent” if banks don't boost capital, Julius Baer'sGattiker told Bloomberg Television's “On the Move” with FrancineLacqua on Oct. 19.

Bank of America's Boone says the threat of a creditcontraction similar to 2008 remains small. Her banking-analystcolleagues expect loan growth to decrease to 2.6 percent next yearfrom 3.3 percent in 2011. If that comes to pass, then ECB studiessuggest the effect of such a decline on economic growth would be toreduce it from Bank of America's 0.8 percent forecast next year to0.77 percent or 0.63 percent, depending on the study, shesaid.

Hiring Constrained

Small and medium-sized companies say they are particularlyvulnerable because they lack the cash and ability to issue bondsthat larger companies have, according to strategists at CreditSuisse Group AG's private-banking division.

Edward Hamilton, owner of Cheltenham, U.K.-basedadvertising agency Artful Ltd., said he can't hire more staff andis missing contracts because his bank is seeking to reduce hiscompany's credit line. Hamilton, who employs half a dozen people,said his confidence in the future is at its lowest in 30 years ofrunning the business.

“They are trying to reduce the overdraft facility so thatthey can stave off their losses on their loans to Greece,” he saidin a phone interview. “I am not going to put myself in a positionwhere I am paying twice as much for a loan from a bank. I will findthe money elsewhere.”

More than 30 percent of small businesses say they have beenmissing opportunities because they were denied bank financing,Andrew Cave, head of the U.K.'s Federation of Small Businesses,said in an interview.

'Money in the System'

“Banks have the money to be able to carry on businesses inmore lucrative investment banking,” he said. “There's still moneyin the system. It's just a choice the banks make as to where theyplace that money.”

Maurizio Guidi, co-owner of EUSolar Srl, a builder of solarplants in northern Italy, said he has been losing contracts forthree months because his clients, including farms and smallcompanies, can't get bank loans.

“Last month we lost a contract with an agriculture businessbecause the company didn't obtain a credit line to finance theplant,” Guidi said in an interview. “They were solvent and withoutparticular problems, but the bank told them that they are notwilling to lend money for more than 10 years. Banks only borrowmoney for short periods and at higher costs. I'm in the businesssince 2005, and I think that a new credit crunch period is aroundthe corner.”

The banks' lending argument may backfire, pushingpoliticians to press lenders to raise cash from shareholders, anoption they want to avert because it would be dilutive and, if theywere to use government money, lead to policy makers having more sayin their operations.

“The banks need to deleverage, but if they choose todeleverage by cutting assets not by raising equity then it willhave negative consequences for the economy,” Simon Maughan, head ofsales at MF Global Holdings Ltd. in London. “It's much better toforce a deleveraging through more equity even if that means it hasto be forcibly injected in the banks.”

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