ECB supervisor sees no room for lowering capital demand on banks

HELSINKI (Reuters) - There is no room for lowering capital requirements for euro zone banks but watchdogs should avoid "straight-jacketing" bankers and stifling innovation, a European Central Bank supervisor said on Tuesday.

Pentti Hakkarainen, a member of the ECB's Single Supervisory Board that oversees the euro zone's largest banks, batted back industry complaints over how much cash and capital banks have been asked to set aside in the aftermath of the financial crisis.

He cited a 2010 study that put the ideal level of Tier 1 capital at between 16 percent and 19 percent of risk-weighted assets - higher than current levels in the euro zone.

"I do not see anything within recent research that leads me to think this estimate was too high," Pentti Hakkarainen told an audience in Helsinki.

"As both our minimum standards and global banks' current capital ratios remain somewhat short of this level - I see no room for relaxing capital requirements at this time," he added.

The ECB has put pressure on banks to build up capital since taking over as supervisor four years ago, in a bid to avoid a repeat of the 2008 financial crisis and the ensuing taxpayer-funded bailouts.

Tier 1 capital ratios in the euro zone have increased on average by 3.4 percentage points since then and are now above 15 percent, Hakkarainen said.

But he said supervisors should be wary of going too far, particularly if their actions have side effects that had not been anticipated when the rules were written.

"We need to avoid straight-jacketing balance sheets excessively," Hakkarainen said.

"We must continue to allow market participants to have the space to decide for themselves their business strategies, giving bankers the space to breathe and to innovate in the interests of customers," he added.

(Reporting by Jussi Rosendahl; Writing by Francesco Canepa in Frankfurt; Editing by Christoph Steitz and Andrew Heavens)