European banks will need at least another five years to bolster their capital base in line with new regulations, as they wait for loan books to slowly expire rather than sell them at a loss, a report said on Thursday.
The resultant protracted shortage of credit for firms and individuals risks starving investment and spending and, in turn, hinder the economic recovery, according to a Deloitte survey of banks representing 11 trillion euros ($14.19 trillion) in assets.
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Banks need to reduce loan portfolios and trading positions to comply with regulators' demands to put up more of their own money for every dollar they lend.
Almost three quarters of respondents to the Deloitte survey said that reducing balance sheet debt is likely to take more than five years - longer than previous banking crises.
The IMF expects banks to reduce their balance sheets at a faster pace than suggested by Deloitte.
October's Global Financial Stability Report said European banks are likely to offload $2.8 trillion in assets over two years, or over 7 percent of total assets.
But Deloitte's report found the process - known as deleveraging - will be "surprisingly modest", involving less than 7.5 percent of total assets over five years.
"While the numbers involved are large in nominal terms, this is a relatively small compared with the expansion of credit in the boom years," said Margaret Doyle, head of Financial Services Research at Deloitte.
Less than half of the 18 banks in the survey believe that selling off assets will play an important part in bringing down how much debt they hold.
Finding a buyer was the biggest problem for nearly 60 percent of respondents.
The fragile state of the European economy, meanwhile, has barricaded other avenues to higher capital levels, such as ploughing back earnings or asking investors for more money.
Banks will be particularly reluctant to divest assets if they expect this to worsen their capital position, and more than 5 percent of respondents expect deleveraging to have a negative impact on their bank's Core Tier 1 ratio.
While a rapid deleveraging process might require banks to take big losses on assets, the Deloitte report said a very slow deleveraging can raise questions about whether the assets remain overvalued following a credit boom.
"The uncertainty can slow economic recovery," the report said. "This adjustment path may feel less painful in the short run, but at the price of a slower economic recovery."
(Editing by Douwe Miedema and Hans-Juergen Peters)