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Capital Is Key Issue for Euro Banks: JP Morgan Exec

The “key issue” facing Europe’s banks is raising capital, not improving liquidity, JP Morgan Chase International’s chairman Jacob Frenkel told CNBC Wednesday.

Frenkel said the European Central Bank’s 3-year loan facility — also known as its Long-Term Refinancing Operation, in which the Bank lends unlimited amounts for 3 years at its record-low 1 percent interest rate — has abated the risk of a liquidity crisis, but does not tackle the more serious problem of bank capitalization.

“I would think about this policy as one which provides breathing space for other policy measures to take place. The ECB provides liquidity to banks, so that a shortage of liquidity will not stand in the way of recovery,” Frenkel said in an interview at the World Economic Forum in Davos.

“But I would like to say that the key issue is not liquidity, it is capitalizing the banks, and enhancing competitiveness. Europe has lost competitiveness, and unless measures are taken to improve competitiveness, we will not make good use of this time,” he said.

Frenkel added that banksneed to raise a “very significant” amount of capital. “Probably all areas need to be mobilized… governments will need to come back into this game,” he said.

In December, the European Banking Authority told banks to raise 114 billion euros ($147 billion) in fresh capital by the end of June 2012.

In addition, financial institutions must increase their core Tier 1 capital ratio — the ratio of core equity capital to assets — to at least 9 percent.

Frenkel said the recessionary environmentincreased the need for strong capital buffers in the financial sector.

“In times of vulnerability, you need to improve your fortress. That is where governments come into the game. Governments need to lengthen the horizon that banks and other players have, so that they can plan forward,” he said.

Frenkel added that government policy clarity is vital in encouraging bank lending, and decreasing the sector’s reliance on central bank loans.

“The business of banks is lending, and the fact that banks are reluctant to lend needs to be explored. At least in some cases, it reflects a lot of uncertainty, and lack of complete clarity about the end game, about the regulatory framework,” he said.

Frenkel was appointed chairman of JP Morgan Chase Internationalin 2009. He is a former chair of Merrill Lynch, and twice served as Governor of the Bank of Israel between 1991 and 2000.

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