European Bank Capital Results Overtaken by Tougher Global Rules

EU Financial Services Chief Michel Barnier
The EU’s financial services chief Michel Barnier said he has “reservations” about some of the Basel findings, “which do not appear to be supported by rigorous evidence and a well-defined methodology.” Photographer: Jerome Favre/Bloomberg

The Europe Union’s top bank regulator will release figures today detailing how lenders met a 114.7 billion-euro ($148.5 billion) capital target, as the bloc is criticized for failing to properly implement tougher global standards.

European banks boosted their capital reserves by 94.4 billion euros by a June deadline, the European Banking Authority has said in July. The increase is part of a plan to boost investor confidence in the bloc’s financial system and protect lenders from the decline in value of sovereign bonds.

The amount raised is about a third of what the EU’s biggest banks would need had new Basel Committee on Banking Supervision rules been enforced at the end of 2011. The bloc’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, the EBA said last week.

“The interesting thing is that the valuation methodology will be superseded” by fresh global and European standards known as Basel III and CRD IV, Bob Penn, financial services lawyer at Allen & Overy LLP, said in a telephone interview in London. This will “limit the value of the exercise looking forward.”

International teams of regulators found weaknesses in the EU draft implementing measures for the Basel III standards, the Basel Committee said this week. Michel Barnier, the EU’s financial services chief, said he has “reservations” about some of the Basel findings, “which do not appear to be supported by rigorous evidence and a well-defined methodology.”

Peer Review

For the EU, the peer review said that the bloc’s draft rules on what counts as core capital are insufficiently detailed. The review also cited concerns that capital rules for so-called bancassurers, lenders with insurance arms, wouldn’t be as tough as the Basel standards.

European lawmakers are struggling to meet a January 2013 deadline set by the Basel committee for implementing new standards, which more than triple the core capital that lenders must have to stave off insolvency and require banks to build up buffers of easy-to-sell assets. The measures were published by the group in 2010 and banks have until 2019 to comply with all the rules.

The EBA told European banks in December to raise 114.7 billion euros in fresh capital. The agency required banks 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.


European banks have raised about 72 billion euros by selling shares, holding on to profits and converting lower-quality capital to common equity. The rest came from adjusting models lenders use to measure the risk of liabilities.

National regulators will give figures for individual lenders starting at 5 p.m. U.K. time today.

Four banks, including Dexia SA, Bankia SA in Spain and WestLB AG in Germany, have since been involved in “such deep restructuring” that they were no longer considered part of the program, bringing the final capital shortfall to 76 billion euros, the EBA said.

The December figure also included six Greek banks, which had a shortfall of 30 billion euros. The Greek lenders’ capital needs will be addressed through the International Monetary Fund bailout, the EBA said.

While banks shrank their assets by about 22.6 billion euros, the exercise didn’t affect commercial and consumer lending, according to the EBA, which previously stated it wouldn’t allow banks to meet their targets by cutting loans.

Lenders tapped public funds where private measures weren’t enough. Three Portuguese banks took around 6 billion euros in capital from the state, while Italy’s Banca Monte dei Paschi di Siena SpA was stabilized with 2 billion euros from the government to meet the EBA’s target.

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