The Central Bank deputy governor Matthew Elderfield yesterday recommended a “breathing space” from any further capital buffer initiatives for European banks.

The European Banking Authority is completing this year’s stress test which obliged 31 lenders to plug a €115 billion capital hole.

Mr Elderfield, who is the alternate chairman of the EBA, said yesterday that the authority’s decision to postpone its next stress test exercise until 2013 was sensible. He was speaking at a Berlin conference organised by German chancellor Angela Merkel’s conservative party CDU and its Bavarian partner, the CSU.

He said there was an argument to be made for a breathing space to let political decisions on the sovereign debt crisis be fully implemented, both in terms of fiscal discipline and in building an adequate financial firewall.

“Indeed, if this does happen, and has a sustained positive impact, it could eventually give scope to the authority to revisit the necessity of the full scale of the current capital buffer,” he said.

He said that with looming Basel III rules already set to gradually require banks to hold greater capital buffers, stress testing could revert to its original brief of providing the basis for management and supervisory judgment, rather than as an automatic capital formula.

Mr Elderfield, a former head of financial regulation in Bermuda, cautioned against using a vast amount of money to convince markets that Europe’s problems had been solved if that forced countries with debt concerns to borrow more to recapitalise their banks.

“For countries with debt problems, they need to borrow more to afford the ammunition for the bazooka and their debt sustainability position gets worse,” he said,

The negative feedback loop could only be broken by investment, rather than borrowing, from outside the loop, he said. – (Additional reporting Reuters)