EU Regulator Tells Banks to Raise $153 Billion in Fresh Capital

European Central Bank
A Euro sign sculpture stands in front of the European Central Bank's (ECB) headquarters in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg

European Union banks must raise

114.7 billion euros ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis.

German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders

26.2 billion euros in core tier 1 capital, the European Banking Authority in London said yesterday. The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA and

7.97 billion euros for Italy’s UniCredit SpA.

European leaders are demanding the region’s banks bolster capital to withstand writedowns after they agreed to take losses on Greek bonds. The EBA estimated two months ago that the region’s financial institutions needed 106 billion euros to increase their core Tier 1 capital to a target of 9 percent of risk-weighted assets by mid-2012, after marking their sovereign bonds to match market prices.

“It looks as if the banks are running just to stand still,” said Matthew Czepliewicz, a banking analyst at Collins Stewart in London. “The backdrop has worsened, therefore banks in the interim have decided to lower their sovereign holdings and some have raised equity, so they’ve reacted and yet the aggregate number hasn’t changed much.”

The Bloomberg Europe Banks and Financial Services Index fell 3.1 percent to 72.45 in London. Banks received financial support yesterday from the European Central Bank, which coupled an interest-rate cut with a pledge to offer unlimited cash for three years in an effort to help banks avoid a liquidity crisis.

‘Sovereign Risk’

“The objective of the capital exercise is to create an exceptional and temporary capital buffer to address current market concerns over sovereign risk and other residual credit risk,” the EBA said in a report on its website.

European lenders will have to raise a total of 8 billion euros more than estimated by the EBA in October. The updated figures take into account bank’s sovereign holdings through the end of September, rather than estimates which used data from June.

Eight banks failed the regularly scheduled stress tests in July with a combined capital shortfall of 2.5 billion. The EBA, which is required to run the exercises annually, will postpone next year’s tests until after June to allow banks to complete this round of capital-raising, an EU official said yesterday.

Deutsche Bank, BNP

Other lenders needing to bolster their reserves include Deutsche Bank AG, with a shortfall of 3.2 billion euros, Banco Bilbao Vizcaya Argentaria SA, which missed the target by 6.33 billion euros, BNP Paribas SA, with a shortfall of 1.5 billion euros, and Societe Generale SA, which needs 2.1 billion euros. Commerzbank AG needs 5.3 billion euros to meet the target, German regulator Bafin said. France’s Groupe BPCE, the owner of Natixis SA, had a 3.7 billion euro shortfall, and Italy’s Banca Monte dei Paschi di Siena SpA needs to raise 3.27 billion euros.

Dexia SA, the French-Belgian lender that’s being broken up, said it won’t have to comply with capital rules set by the European Banking Authority because it’s planning to “radically shrink in size.”

The EBA said Dexia would need to raise 6.31 billion euros to reach the capital target, a figure the company said shrank to

4.2 billion euros after the Belgian government’s takeover of Dexia Bank Belgium SA on Oct. 20. In any event, the company’s break-up plan means it will be exempt.

‘Stark Reminder’

The EBA figures are a “stark reminder that banks still have quite a bit of capital to raise in order to satisfy their regulatory requirements,” said Richard Reid, research director for the International Centre for Financial Regulation.

Regulators more than doubled the amount of capital German lenders need to raise from the original 5.2 billion-euro estimate for the country’s banks in October.

Germany’s Landesbank Hessen-Thueringen, known as Helaba, said it would need 1.5 billion euros more than estimated because state participation securities didn’t comply with the regulator’s definition of core capital. Core Tier 1 capital is considered high-quality, loss-absorbing capital.

Helaba blamed “technical formalities” for needing more capital than originally estimated.

French banks will have to raise 7.3 billion euros, 1.5 billion euros less than previously estimated.

The regulator gave banks more time to submit their plans for raising the money to national supervisors, extending the deadline to Jan. 20, from Dec. 25.

‘Bit of a Relief’

The EBA figures “must come as a bit of a relief as some people had been expecting the amount of new capital required to double,” Neil Smith, a banking analyst at WestLB AG in Dusseldorf, Germany, said in a telephone interview.

The EBA rejected calls to extend the June 30 deadline to raise the final amount of capital. Italian lenders had asked for more time to raise the money.

Regulators won’t allow banks to cut lending to companies to meet the 9 percent capital requirement, the EBA said. Lenders should look to bolster their reserves by cutting bonuses, retaining earnings or issuing shares, it said.

“It’s important that banks raise their capital, but they should do it in a way that wouldn’t imply a reduction in lending,” European Central Bank President Mario Draghi said. “That’s not an easy task at this point of time.”

Banks will be allowed to issue so-called contingent capital instruments to meet the requirement if these securities satisfy a series of conditions set by the EBA.

“Only the narrowest of actions” to run down loans and other assets will be allowed, the EBA said. Capital requirements for banks are set as ratios of their reserves compared with assets weighted according to their riskiness.

Regulators can make an exception if a bank is transferring part of its loan book to another company, so that overall lending to the real economy isn’t reduced, the EBA said.

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