Europe’s banks will need to raise 106 billion euros ($149 billion) in fresh capital under tougher rules being introduced in response to the euro area’s sovereign debt crisis, the region’s top banking authority said.
Seventy banks were tested, the European Banking Authority said late yesterday, with Spanish banks needing 26.2 billion euros and Italian banks 14.8 billion euros in core tier 1 capital. The lenders have until Dec. 25 to submit their plans for raising the money to national supervisors. The extra reserves are needed to meet a temporary requirement for lenders to hold 9 percent in core reserves, after sovereign debt writedowns.
“The building of these buffers will allow banks to withstand a range of shocks while still being able to maintain an adequate capital level,” the EBA said in a statement on its website.
European leaders last night struck an agreement to bolster their toolbox for dealing with the region’s sovereign debt crisis. Europe’s currency, stocks and bonds rose after 10 hours of talks ended in Brussels with governments boosting the heft of their rescue fund to 1 trillion euros ($1.4 trillion) and persuading bondholders to take 50 percent losses on Greek debt. Measures also included a recapitalization of the region’s banks and a potentially bigger role for the International Monetary Fund in strengthening the bailout fund.
U.K. banks won’t be required to raise extra capital, according to the EBA figures, whereas German banks will have to find 5.2 billion euros.
The EBA recommended banks withhold bonuses and dividends and go to private markets before seeking government funds to cover any shortfall. Any curbs on discretionary payments would be determined by national regulators on a case by case basis, an EU official said, speaking on condition of anonymity.
The EU’s expectation is that most of the shortfall that was identified by the EBA will be met by private means, a second official said.
The EU will take the crisis into account when deciding on the severity of restructuring measures that should be imposed on lenders that resort to public funds to boost their reserves, the official said.
Lenders’ capital will be measured using a definition of core tier 1 capital that is “largely the same” as that applied by the EBA in this year’s round of stress tests on European Union banks, the agency said. The 70 lenders will be required to reach the 9 percent capital threshold by the end of June 2012, it said.
Spain’s banks have 9 billion euros in bonds that are mandatorily convertible into shares that they can use to reduce the 26 billion capital shortfall according to a document provided by a spokesman for the Spanish government, who declined to be named in line with government policy.
Spanish bonds will face a 3 percent writedown under the EBA plans, according to the document.
The EBA may allow banks to count convertible instruments towards meeting the capital threshold if they are either newly issued and meet a series of “very strict and fully harmonized” criteria to be defined by the agency, or if they are existing instruments that will mandatorily convert into ordinary shares by the end of October 2012, the EBA said.
The October deadline was agreed to avoid banks having to raise extra capital simply because their convertible instruments will become equity slightly after the June deadline for reaching nine percent, the first official said. The EBA’s decision to accept some convertible instruments was taken before last night’s summit, he said.
Greek banks were found to need about 30 billion euros in capital to withstand sovereign writedowns, more than any other EU member state. The EBA said this figure was covered by existing backstop arrangements with the EU and International Monetary Fund and so Greek lenders wouldn’t have to tap the market.
The EBA’s finding that Irish banks would not need to raise extra capital to meet the 9 percent threshold “reinforces the robust and conservative nature” of a capital review exercise carried out by the country’s authorities in March, Irish Finance Minister Michael Noonan said in an e-mailed statement.
The EBA’s estimate of the capital shortfall for the 70 banks is provisional and a final number will be published during November, it said. This updated figure will use banks’ data as of Sep. 30, it said.
Banks capital levels should be calculated taking into account “current market prices” of their sovereign debt holdings, the EBA said.
The 9 percent threshold is measured against banks’ assets, weighted according to their riskiness. This risk weighting should be in line with rules agreed by the Basel Committee on Banking Supervision in 2009 and scheduled to come into force at the end of this year.
These co-called Basel 2.5 rules increase the capital banks must hold against assets on their trading books and against complex securitizations compared with current standards.
Governments should step in “where appropriate” to guarantee bonds issued by banks so as to make it possible for lenders to access funds, the EBA said. The regulator said it will work “urgently” with the European Central bank and European Commission to coordinate such measures.
“The term funding market is currently closed due to increasing concerns over the sovereign situation and banks may find it difficult to address their funding needs in 2012,” the EBA said. Banks benefiting from guarantees would have to pay fees, it said.