Moreover, the originate-to-distribute model was adopted not only by large institutions but also by others, such as Northern Rock, which were not equipped to deal with funding sources considerably more volatile than traditional sources, such as deposits. Recourse to wholesale markets contributed to exacerbating credit pro-cyclicality, with more abundant credit in periods favourable to markets but also greater vulnerability in the case of  GDP ratio, the variations in the long-term interest rate and the house price/equity price gaps can signal asset price busts that are likely to occur in the next two years. 4  Syndicated loans extended to finance LBOs in the euro area reached an annual sum of almost € billion around mid-2007, and in the 2005-07 period loans to finance LBOs constituted around 13% of the total syndicated loan market compared with around 6% both before and after the boom years, based on data from Dealogic. 5  The Tier 1 ratio fluctuated around 8% and the total capital ratio around 11%. See the ECB’s Financial Stability Review, December 2007. 6  See also the box entitled “Developments in MFI loans to non-financial corporations by industry” in the December 2009 issue of the Monthly Bulletin. tighter markets conditions. This problem is not new. The crisis affecting savings and loan undertakings in the United States also originated in the differing maturities of bank assets and liabilities, which gave rise to risky activities in the junk bond and derivatives markets.
The element that marks a growing concern with regard to restrictiveness relates to the capital of banks. Clearly, the considerations in respect of the need to replenish capital are starting to exert a strong influence on the decisions of banks to grant new credit. This dynamic is worrying. It indicates that the banking system is interpreting the new regulations restrictively for credit. This approach is undesirable and out of line with the objectives so far followed by the economic policy authorities of supporting the financial system, not as an end in itself but as an essential function of savings intermediation. The outcry surrounding the effects that future capital standards and risk management – the so-called “Basel 3” – will have on credit developments in the short term seems unjustified. The new rules are specifically intended to ensure a more orderly and sustainable flow of credit, not a reduction. Moreover, as I said earlier, a gradual process of adaptation to the new requirements is foreseen. The new capital requirements may be attained in two different ways, although they have opposite effects on banking activities: reduction in banking activities, particularly in credit to firms, on the one hand, and capital increase on the other. The alarm that seems to be widespread in the banking sector concerning the new rules seems to mask the intention of adapting to them via a reduced exposure to the real economy, rather than via a capital increase.