EU Banks Shrink Assets by $1.1 Trillion as Capital Ratios Rise

European Union banks have shed more than $1.1 trillion of assets since the end of 2011 in a shift away from risky investments such as asset-backed debt as regulators push lenders to shore up their balance sheets.

Lenders reduced assets weighted for risk by 817 billion euros ($1.1 trillion) between December 2011 and June 2013, the European Banking Authority, the bloc’s top banking regulator, said in a report yesterday. Banks’ core Tier 1 capital ratios, a measure of how well they can absorb losses, rose to 11.7 percent from 10 percent over the time period.

Global banks have raised about $500 billion in capital in the aftermath of the financial crisis and fall of Lehman Brothers Holdings Inc. five years ago and are moving closer to complying with tougher global capital rules known as Basel III. The rules include restrictions, known as the leverage ratio, on banks’ use of debt.

“Banks are reducing their risk-weighted assets as they move into the world of Basel III capital requirements,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA. “The leverage ratio has since hit them square between the eyes, which has presented further challenges and requires more de-leveraging, especially for universal banks.”

Data Points

The EBA released more than 700,000 data points detailing how much capital lenders have and where they invest. The agency scrapped its annual stress test in favor of a review next year of banks’ asset quality led by the European Central Bank, which will become the euro area’s chief banking supervisor in 2014.

“Reliable and comparable information on EU banks fosters the trust of investors, as well as the proper functioning of the market,” Andrea Enria, chairman of the London-based EBA, said in an e-mailed statement.

The reduction in assets comes mostly from banks shedding securitizations and cuts in trading activity, according to the EBA, which was set up in 2011 to harmonize banking rules across the 28-member EU.

Banks’ holdings of sovereign debt issued by EU countries remained steady at a total of 1.7 trillion euros. Lenders sold 9.3 percent of their sovereign bonds in 2011, and boosted their holding afterwards by 9.5 percent.

The EBA’s calculations of capital ratios don’t take into account stricter rules, known as CRD IV, which come into effect next year.

“While leverage continues to grow in focus for European banks, following the passing into law of CRD IV, the EBA data cannot be used to analyze fully-loaded CRD IV capital ratios,” Jonathan Tyce, a Bloomberg Industries analyst, said in a note.

Capital Ratios

Denmark had the highest overall core Tier 1 capital ratio at 17.2 percent, banks in the U.K. had an average of 11.7 percent while Slovenia had the least with 8 percent.

Deutsche Bank AG’s risk-weighted assets fell 20 billion euros to 314.3 billion euros, while Barclays Plc’s shrunk to 452 billion euros from 474 billion euros.

The quality of EU retail and corporate debt on banks’ books has worsened since 2011, during a period of government cutbacks and an economic contraction of 0.4 percent in 2012.

Defaulted assets as a percentage of total holdings rose to 3.8 percent from 3 percent overall, the EBA said, with private companies hitting a bad debt ratio of 6.9 percent.

ECB President Mario Draghi will preside over a three-stage review of banks’ assets and their vulnerability to economic shocks, known as the Comprehensive Assessment.

Draghi has said he won’t hesitate to fail lenders if needed, signaling a determination to prove the central bank can spot weaknesses before it becomes the euro area’s single bank supervisor in November.

Lenders have been told that the stress test will have a basis scenario and an adverse-conditions scenario that covers a three-year horizon. Details on how hard government bonds will be stressed and how much capital will be required of banks after the imagined negative scenario will be published in January.