European banks 'need more cash'

Banks in Ireland, Spain, Italy and Britain need to set aside much more money to cover potentially bad loans, credit ratings agency Moody's said today, meaning European taxpayers may again be tapped for cash.

European banks have already raised hundreds of billions of euros to cover possible losses from loans that soured in property and financial market crises. Much of the funding has come from governments.

"We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets," Moody's said in its global banking outlook for 2013.

"Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans," the report added. "This strategy of buying time (often tolerated by regulators) limits a bank's capacity for new lending and poses risks for creditors of European banks." Moody's did not say how much extra money banks would need.

Moody's believes 2013 will be a volatile year for Europe's banks, but expects their credit ratings to remain relatively stable after a raft of downgrades in 2012.

The agency's outlook for US banks is negative due to a challenging home market, while its outlooks for Asia/Pacific, Emerging Europe and Latin America are stable.

A Fitch study showed how retail lenders' assessment of their loan books has grown rosier since the financial crisis despite rising unemployment and a poor economic outlook.

From the end of 2007 to the end of June 2012, the banks' risk weighted assets (RWAs) nearly halved to 35 per cent from 65 per cent despite their loan books, comprised mainly of mortgages, staying relatively stable.

The lower the RWA weighting the greater the chance the loan will be repaid and the less capital a bank needs to hold on its books.

A study of banks with a higher exposure to residential mortgages revealed an even sharper fall in their perceived risk, despite a weaker property market, Fitch said.