June 11, 2018 / 4:17 PM / 4 months ago

UPDATE 1-France tells banks to hold capital buffer for loan risks

* Financial stability body imposes 0.25 pct capital buffer

* All French banks already meeting new capital requirement (Adds reaction, background)

By Leigh Thomas

PARIS, June 11 (Reuters) - France's financial stability council on Monday took the unprecedented step of requiring banks to keep extra capital set aside for risks related to a private sector borrowing binge.

The council, headed by the finance minister, imposed a so-called counter-cyclical buffer of 0.25 percent on banks' risk-weighted assets in France on a recommendation from the central bank.

All French banks already have sufficient capital on hand to meet the limit, a source close to the council said. Foreign banks are also required to impose the buffer on their French assets.

The aim of the unprecedented measure is to ensure that banks have sufficient capital on hand to shoulder any losses on loans that turn sour if the business cyclical takes a turn for the worst in the future.

The French Banking Federation hit back, saying the industry did not understand the decision.

"Credit in France is safe as the low cost of risk and the very low rate of non-performing loans shows," FBF head Marie-Anne Barbat-Layani said in a statement to Reuters.

Bank of France Governor Francois Villeroy de Galhau had repeatedly insisted in recent months that banks should stump up extra capital in light of a credit boom underway.

Driven by big companies looking to lock in low interest rates, bank lending to the private sector has surged, up 5.1 percent in April from the same period last year, according to the Bank of France.

As a result private sector debt has reached a record of more than 130 percent of gross domestic product, the highest in the euro zone.

Though France has so far never required the capital buffer before, the financial stability council has already required France's six biggest banks to limit their exposure to the most indebted corporate borrowers. (Reporting by Leigh Thomas; Additional reporting by Maya Nikolaeval; Editing by Richard Lough)

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