December 09, 2011
EUROPEAN banks must come up with a total of €114.7 billion ($150bn) in new capital by June, the European Banking Authority said yesterday, as regulators took their latest stab at restoring confidence in the continent's beleaguered banking industry.
The capital shortfalls are spread across more than 30 banks in 12 countries. A total of 71 banks were subjected to an EBA exam assessing their need for cash.
The cumulative amount banks need to raise -- by selling assets, retaining profits, issuing shares or other means -- is slightly greater than the preliminary estimate of €106bn the EBA issued in late October. That is largely because the EBA tightened its criteria on what banks can count as capital.
Individual banks will need to tell their national regulators by January 20 how they intend to come up with the funds. The EBA's exercise, underway since early October, is one of the centrepieces of broader efforts to defuse Europe's two-year financial crisis. The crisis, stemming largely from doubts about the abilities of some countries to repay their debt, has engulfed the banking industry because many lenders are holding billions of euros of such assets.
Anxiety over banks' financial health has resulted in them being largely locked out of normal funding markets, forcing many lenders to lean on the European Central Bank as their lender of last resort.
The EBA identified the biggest capital deficiencies in Spain and Italy, where banks need to find a total of €26.2bn and €15.4bn, respectively. Already, banks in those countries have announced plans to fill at least some of the shortfalls by tinkering with their balance sheets and ridding themselves of certain assets and business lines.
The EBA estimated Greek banks' total shortfall at €30bn, but that represents the size of its banking bailout fund, not the expected capital hole at the banks.
The biggest surprise came in Germany, where the largest banks face a total €13.1bn shortfall, compared to an estimate of roughly €5bn in October. The increase stems from the EBA adopting a more restrictive attitude toward a certain type of capital historically favoured by German lenders.
That deficit -- including a €5.3bn gap at Commerzbank, second only to Deutsche Bank among German lenders -- raises questions about whether the German government might need to provide capital itself. Commerzbank is already 25 per cent-owned by the government after nearly collapsing during the 2008 financial crisis. Commerzbank said yesterday it has various ways to raise capital without resorting to government aid. "We stand by our intention not to make use of additional public funds," finance chief Eric Strutz said.
The EBA arrived at its new capital requirements by examining the banks' overall balance sheets, in particular their portfolios of European government bonds, as of September 30. The London-based regulator then applied loss rates to the government bond portfolios based on the current market prices of that debt. Banks that fall short of a so-called core Tier 1 ratio of 9 per cent, a measure that compares their capital to their assets, including items such as loans and holdings of bonds, need to come up with additional funds to close the gap.
The project is distinct from the EBA's banking "stress tests" this summer. Those exams assessed the banks' abilities to weather a deteriorating economic environment by applying a range of loss estimates against the banks' entire balance sheets. Those tests identified a cumulative €2.5bn capital shortfall across the sector, an amount that most experts dismissed as unrealistically low.
The latest capital exercise only looks at potential losses on the banks' sovereign debt portfolios.
Banks and some national governments have bitterly fought against elements of the EBA's capital-testing initiative. Some sought to win more time, beyond the June 2012 deadline, to achieve the higher capital ratios. Others lobbied for looser definitions of what constituted capital.
While the cumulative €115bn shortfall is a large number, it is unlikely to result in waves of banks going hat in hand to investors for more money. Instead, banks are likely to try to find alternate -- and less painful -- ways of raising the required funds.
The EBA's goal is to force lenders to raise more capital without curbing lending, which some banks argue is their preferred method of complying with the tougher requirements. To ward off that threat, which could further strangle already ailing European economies, the EBA is barring banks from presenting plans to raise their capital ratios that rely on reducing lending to the real economy. But EBA officials privately acknowledge that will be tough to enforce.
The capital raising process has already begun. Many big banks have restructured certain debt instruments so that they count as high quality capital. Italy's UniCredit last month announced plans for a €7.5bn offering of shares to existing investors. That will mostly remedy the bank's €8bn capital deficit.
Spain's largest lender, Banco Santander, over the past month has unveiled a string of asset sales, including parts of some prized possessions, in order to beef up its capital ratios. Among those are planned sales of all or parts of businesses in Brazil, Colombia and Chile. The Madrid-based bank faces a €15.3bn shortfall.
In France, leading banks BNP Paribas and Société Générale both revealed plans to get rid of tens of billions of euros of assets, including some entire business lines, in response to the EBA's demands for thicker capital cushions. Société Générale also suspended its dividend to conserve funds.
The EBA said yesterday BNP's total shortfall is €1.5bn, while Société Générale's is €2.1bn.
Article by David Enrich From: The Wall Street Journal Additional reporting: Laura Stevens