Europe's top banking regulator is set to decide later this week how much extra capital the region's banks will need to cope with a deepening euro zone debt crisis.
The European Banking Authority's (EBA) board, meeting on today and tomorrow in London, could release the details of the bank recapitalisation plan as early as tomrrow. But it could come later as European Union leaders hold a make-or-break summit aimed at fixing the financial crisis tomorrow and Friday. The leaders of France and Germany have promised a "powerful" deal.
The EBA in September said 70 banks needed to raise €106 billion to ensure all had a minimum core capital level of 9 per cent of risk-weighted assets. It gave banks until mid-June next year to reach that level.
German landesbank Helaba has been added to the EBA's list of firms needing to raise capital, three financial sources told Reuters. The German bank had walked away in anger from a health check on the industry in the summer.
The capital hole for some banks has also risen since September - German banks are now expected to need about €10 billion, double the earlier prediction - as the EBA has tightened its definition of what capital qualifies.
There is growing concern that banks will meet the higher capital demands mostly by shrinking their loan books, which could hurt economic recovery.
European banks could deleverage by up to €3 trillion in the next two years, or by as much as €4.5 trillion on a five- to six-year horizon, analysts at Morgan Stanley estimated.
That could boost the banking sector's core Tier 1 capital ratio - a measure of financial strength - by 130 basis points to an average of 10.7 per cent, but several banks will be below 9 per cent and need other measures to boost capital, Morgan Stanley said.
The EBA also wants EU leaders to agree a comprehensive set of funding guarantees for lenders who cannot rollover their debt easily, which it sees as a key part of its recovery plan. EBA Chairman Andrea Enria said the funding situation "is now posing a serious threat to growth prospects."
Banks are also keen for details on the type of capital they can use to help plug any hole, and are awaiting the EBA's requirements for bonds know as contingent capital or "CoCos," that convert into equity under certain conditions.
CoCos are expected to have a conversion trigger point of around 7 per cent, meaning the bonds would convert into equity if a bank's core capital level falls below that level.
But the EBA faces a tough balancing act to structure the CoCos. The trigger point needs to be high enough to satisfy regulators, but low enough that they aren't too risky for investors, and they also need to be cheap enough for the banks issuing them, bankers said.
Reuters
