EU bank capital hole deepens to €115b

(Reuters) – Europe’s banks must find €114.7 billion (RM482 billion) of extra capital, more than predicted two months ago, to make them strong enough to withstand the euro zone debt crisis and restore investor confidence.

Europe’s banking watchdog, confirming a Reuters exclusive earlier yesterday, said the capital shortfall across 71 banks was almost 8 per cent higher than the €106.4 billion estimated in October, telling banks in Germany, Italy, Austria and Belgium to find more cash.

Banks will look to fill any shortfall through rights issues, shrinking loans to customers, selling assets or cutting dividends or pay for staff. National governments may have to bail out any lender unable to find the cash.

German banks need to find €13.1 billion, more than double the €5.2 billion estimated in October, the European Banking Authority (EBA) said. Commerzbank needs €5.3 billion and Deutsche Bank needs €3.2 billion.

Spanish banks need to find an unchanged €26.2 billion, including €15.3 billion at Santander and €6.3 billion at BBVA.

The average core capital of EU banks, excluding those in Greece, was just over 9 per cent at the end of September, not far from the average for their top US peers.

But Europe has been criticised for less effectively stress testing its banks than the United States did in 2009.

That is mainly because European governments have not forced weaker banks to capitalise, lacking the power of the Federal Reserve, which immediately provided the funds to shore up US lenders to revive investor confidence.

European governments now face the prospect of having to plough more money into lenders struggling to balance a weaker economic backdrop against tougher regulation.

Germany’s Commerzbank stood by its commitment to avoid taking more help from Berlin, which would tip it nearer to full nationalisation.

“We stand by our intention not to make use of additional public funds,” Eric Strutz, finance director, said in a statement.

German Finance Minister Wolfgang Schaeuble said he expected banks to meet their commitments by mid-2012.

“In arranging the recapitalization everything possible is being done to avoid giving the wrong incentives to reduce business,” he said. “In particular there are no grounds for trying to improve capital ratios by selling sovereign bonds.”

In all, some 31 of the 71 banks tested need extra capital. They have until January 20 to present their plans and need to fulfil the capital requirements by end-June, the EBA said. Several banks have taken action to improve capital since the end of September.

The EBA’s recapitalisation plan is part of a three-pronged approach that also deals with sovereign debt exposures and improving access to funding. The aim is to restore confidence without crimping lending in a fragile economy.

The European Central Bank said yesterday it would start offering banks liquidity funding for 3 years for the first time ever, to try to head off a credit crunch.

EU leaders are meeting yesterday night at a high-stakes summit aimed at agreeing a plan to defuse the crisis, with France and Germany pushing for rule changes to enforce stricter budget discipline in the bloc.

The EBA said banks should have core Tier 1 capital of at least 9 per cent of risk-weighted assets, which exceeds the 7 per cent minimum world leaders have agreed to phase in from 2013.

Europe’s banks may need to tap shareholders for less than €30 billion to plug the hole, analysts have estimated.

Greek banks have been told they need an extra €30 billion of capital, but this should be covered by an existing programme of aid, while €9 billion of the shortfall in Spain will be met by debt that converts into equity.

BNP Paribas, Societe Generale, UniCredit, Commerzbank and other banks are reducing loans, an alternative to raising equity, which is costly at present due to depressed share prices.

That has sparked fears of tighter credit hurting economic recovery. Europe’s banks could “deleverage” by up to €3 trillion in the next two years, or by €4.5 trillion over the next 5-6 years, analysts at Morgan Stanley estimate.

The EBA said it will limit deleveraging banks can do to meet targets, saying national regulators could exclude it from the calculation. Banks should first try to raise funds, retain earnings, reduce bonus payments and other liability management measures.

Banks in France will need €7.3 billion, down from €8.8 billion in October and banks in Italy will need €15.4 billion up from €14.8 billion. Austrian banks need €3.9 billion up from €2.9 billion and Belgian banks need €6.3 billion up from €4.1 billion. British banks, as previously, do not need any extra capital.