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Monte Paschi Falls Short as EU Lenders Boost Capital

Monte Paschi Falls Short as EU Lenders Boost Capital in Crisis
Banca Monte dei Paschi di Siena SpA and banks in Cyprus and Slovenia failed to meet capital requirements set by European regulators as lenders raised more than 200 billion euros ($258 billion) in an effort to bolster investor confidence. Photographer: Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA and banks in Cyprus and Slovenia failed to meet European Union capital targets as lenders raised more than 200 billion euros ($258 billion) to bolster investor confidence.

The 27 banks with shortfalls 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 today. 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.

“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,” Andrea Enria, chairman of the EBA, said in an interview today.

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 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.

Banks will be required to maintain their capital levels 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 global standards, known as Basel III, the EBA said.

Sovereign Buffer

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.

Nova Kreditna expects to meet the target “through private measures” by end 2012, the agency said. Slovenian authorities have committed to an “ultimate and eventual recapitalization” if needed.

Nova Kreditna “needs at least 100 million euros in fresh capital as it will probably report a loss this year, similar to last year’s at around 80 million euros,” Andraz Grahek, an independent financial analyst and a former fund manager at KD Funds LLC in Ljubljana.

Capital Boost

Measures to boost Nova Kreditna’s capital ratio are “already in progress,” the bank said in a website statement. The lender’s core capital ratio at the end of June was 7.4 percent of risk-weighted assets, it said.

The two Cypriot banks that failed to reach the capital level had a combined shortfall of 1.86 billion euros, the nation’s central bank said in a statement.

Calls to Bank of Cyprus and Cyprus Popular Bank’s investor relations departments after the results were released received no reply.

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.

Biggest Banks

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.

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