In the FT, Patrick Jenkins argues that new bank core tier one capital ratios of 9% could lead to reduced lending. He explains that several big banks across Europe have made clear that they will reduce lending commitments rather than raise additional capital in order to meet new EU capital requirements.
A capital ratio is simply the capital account divided by total assets. As every school child knows (or should know!) the ratio can change from either a change in the numerator (capital), a change in the denominator (total assets), or a change in both. If government mandates that banks maintain a higher ratio, banks may choose to decrease the denominator (total assets) instead of increasing the numerator (capital). They would decrease total assets by reducing lending; i.e., not only refusing to make new loans but also refusing to renew existing loans. In today's money environment in which governments manipulate interest rates and change banking regulations as their whim strikes them, the market for new capital issues cannot be very attractive. Why risk more capital in such an environment?