European funds to continue retreat from Asia

An almost desperate need to bolster their balance sheets will ensure European banks will continue to lose leverage in Hong Kong and the rest of Asia.

Richard Sennitt, emerging market manager for Schroders plc, said the new capital raising requirements being enforced in Europe may lead to a withdrawal of funds lent to Asian firms.

“The problem is that now these banks are coming under pressure and are going to start withdrawing credit from their offshore loan books. The great thing about Asia, however, is that it is remarkably underleveraged.

“Domestic banks can take up the slack as European banks exit as they are in the opposite situation – they have less competition and better margins.”

In effect, Asian banks will fill the lending gaps being created by the Eurozone debt crisis.

Asked how quickly European funding may be withdrawn, Sennitt said it would take longer to close out loan deals than the six months left before the new European capital ratio requirements came into force.

Under the Basel III regulation passed by global regulators, European banks must raise the amount of capital they hold to 9% of risk-weighted assets. The European Banking Authority last year said it would take steps to ensure that banks did not de-lever too quickly and destabilise the wider financial system.

With headquarters in London, Schroders is a British multinational asset management company. It employs 2,900 people in 25 countries in Europe, America, Asia and the Middle East.