European Banks Told to Hold On to $258 Billion of Fresh Capital

The European Union’s top banking regulator told the bloc’s lenders to hold on to more than 200 billion euros ($258 billion) in capital raised to pave the way for tougher global standards.

The 27 banks that were required by the European Banking Authority to submit plans for their capital raising attained a total of 116 billion euros, the London-based EBA said yesterday. Including aid to Greek and Spanish banks, European lenders increased their capital reserves by more than 200 billion euros since 2011, according to an EBA report published on its website.

“We want banks to hold on to and keep building capital,” Andrea Enria, chairman of the EBA, said in an interview yesterday. “The key positive in the response of banks to this exercise is that 75 percent of the shortfall was raised by retaining earnings and other measures -- fresh capital.”

Investor confidence in the EU’s banking industry nosedived as the sovereign debt crisis faced by countries including Greece, Spain and Italy worsened last year. The EBA told European banks in December to raise 114.7 billion euros in new capital. The agency required lenders to keep a core Tier-1 capital ratio of 9 percent and hold additional reserves, called a sovereign buffer, to protect against falling bond prices among euro-area nations.

Photographer: Hannelore Foerster/Bloomberg

Andrea Enria, chairman of the European Banking Authority, speaks at the ESRB news conference in Frankfurt, Germany, on Thursday, Dec. 22, 2011. Close

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Photographer: Hannelore Foerster/Bloomberg

Andrea Enria, chairman of the European Banking Authority, speaks at the ESRB news conference in Frankfurt, Germany, on Thursday, Dec. 22, 2011.

Banca Monte dei Paschi di Siena SpA and banks in Cyprus and Slovenia failed to meet European capital targets.

‘Weaker Links’

“The tests forced some discipline on capital and some of the weaker links were forced to raise equity,” said Ronny Rehn, an analyst at Keefe, Bruyette & Woods in London. “Still, the tests don’t reveal the true stress of banks’ loan books.”

Banks will be required to maintain their loss-bearing buffers rather than pay out the money raised in dividends or bonuses “to be able to absorb unexpected losses and to support a smooth convergence” to tougher standards, known as Basel III, the EBA said.

The sovereign buffer will remain in place for the time being, and will be evaluated in the future based on “the market environment,” the EBA said.

Cyprus Popular Bank Pcl, Bank of Cyprus Pcl, and Nova Kreditna Banka Maribor d.d. are the other three lenders missing the target. Any public support needed to get these lenders to the 9 percent threshold should be activated by the end of 2012, the EBA said.

“The necessary backstops have been endorsed by the corresponding governments and are being implemented” for Monte Paschi, based in Siena, Italy, and the Cypriot lenders, the EBA said.

Oldest Bank

Monte Paschi, the world’s oldest bank, missed a June capital target by 1.7 billion euros, the lender said in a statement on its website. This “is being addressed” with the explicit support of the Italian government,” the lender said.

“The news is only the confirmation of what was already known,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities. “Monte Paschi needs to address the issue by the year end. The implementation of state aid request will allow it to become EBA compliant.”

Monte Paschi is borrowing 3.4 billion euros by selling bonds to the state to plug the capital gap, after Chief Executive Officer Fabrizio Viola, who took over in January, failed to find private funding to meet the EBA’s requirement.

Lenders will be expected to set out plans for meeting the Basel Committee on Banking Supervision rules, which more than triple the core reserves lenders have to hold compared to previous international standards. The measures are scheduled to fully apply from 2019.

Systemic Risk

The EU’s 44 biggest banks would have needed an extra 312 billion euros in their core reserves when taking into account additional surcharges to account for systemic risk if the rules had been in place in 2011, the EBA said last week.

“No doubt part of the objective here is to underpin investor confidence, but it does suggest that banks will have to step up efforts to raise equity,” Richard Reid, research director for the International Centre for Financial Regulation in London, said by e-mail.

Banks’ road-maps for meeting the Basel rules “will be monitored by national supervisors in cooperation with the EBA,” the regulator said.

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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