Brussels, 28/10/2011 (Agence Europe) - On Friday 28 October, the president of the European Banking Federation (EBF), Christian Clausen, set out three options for banks to increase their core capital to 9% as decided by the eurozone summit, namely re-investing profits, converting lower quality into highest quality capital and deleveraging (getting out of debt) by selling off capital-greedy assets (see EUROPE 10483). On the first point, he said that some €120bn of profits had been made by European banks in 2010 and the 2011 figures would be much the same. If these private sources of capital do not suffice, banks would approach the market or request public bailouts, said Clausen, who is head of Scandinavian bank Nordea. He said that a substantial proportion of the recapitalisation would be done by the banks themselves, but refused to say how much.
On Thursday 27 October, the leaders of the eurozone rubberstamped the deal worked out by finance ministers on bank recapitalisation, needed because of the huge losses in sovereign debt bonds over the summer, of which the banks hold substantial portfolios. The 70 biggest European multinational banks have until the end of June 2012 to increase their core Tier 1 capital to 9%, after taking into account the market value of their eurozone sovereign debt exposure as at 30 September 2011. The eurozone says this will involve reducing dividends and bonuses.
Figures published by the European Banking Authority (EBA) suggest that Greek, Spanish and Italian banks will have to increase their capital by €30bn, €26bn and €15bn respectively. French banks BNP Paribas and Société Générale and Germany's Commerzbank have already said that they will not need public funds, as have the Spanish banks, explained Spanish Finance Minister Elena Salgado. Banks have until 31 December 2011 to submit a viable capitalisation plan to their national supervisor.
On the fringes of the summit, Polish Finance Minister Jacek Rostowski said that the recapitalisation was a temporary process to set up a capital buffer. Asked how the new buffers would interact with the other capital buffers set out in the EU's CRD IV rules (transposing the Basel Committee's Basel III Agreement on the quality and quantity of bank capital, see EUROPE 10424 and 10420), Clausen said the two processes were independent of each other and the eurozone's decisions were exceptional, arising from exceptional circumstances. He said the CRD IV recapitalisation, valued by the European Commission at €430bn by 2019 for more than 8,000 European banks, would be “much bigger”.
Cash flow. Along with increased capital, the eurozone leaders decided that the nation states could act as guarantors to banks to ensure they can fund themselves in the medium-term and continue to finance the real economy. International investors fear whether the write-down in sovereign debt would affect European banks' ability to raise cash on the interbank markets. Several central banks, including the ECB, intervened last month to facilitate re-financing in dollars. Clausen said there was clearly a need because banks are facing problems and the guarantee systems will alleviate the pressure on the banks.
The EBA says in a press release that European banks will have problems with raising capital next year because the long-term financing markets are currently shut due to growing concern about eurozone countries. Banks will be able to raise cash from national guarantee systems by paying a forfeit to the authorities depending on the risk profile. EBA points out that equivalent schemes introduced during the 2008 financial crisis had allowed countries to make profits. The Commission will have to ensure that a coordinated approach is followed at EU level in terms of eligibility and terms and conditions. (MB/transl.fl)