THE DRIVE to recapitalise Europe’s weakest banks could cost up to €200 billion, with much of this coming from taxpayers.
Amid fear that another credit crunch could amplify the threat of a global recession, a key aim is to bolster banks so they can withstand the impact of the new Greek deal and any consequent market turmoil.
Overriding that, however, is mounting pressure to strengthen banks to such an extent that concern about their financial health dissipates. Given the huge sums of money required, this is hugely contentious.
THE PROBLEM
Regulators carried out a second stress test on Europe’s banks last summer. However, the exercise failed to convince markets because it did not account for the possibility of losses on their holdings of sovereign bonds.
In an examination of bank data expected this week, the European Banking Authority is now likely to take account of the deterioration in the market value of bonds in the most distressed euro zone states. The authority is known to be privately pushing for banks to target 9 per cent of core tier one capital in a stress scenario.
This is higher than the 5 per cent at which banks were tested during the summer. But it is still lower than the 12 per cent used when Irish banks were reinforced in March. Accordingly, Irish
banks are unlikely to need any more capital this time round.
THE FIX
The International Monetary Fund reckons the banks need about €200 billion, but estimates vary. While Morgan Stanley says Europe might get away with a €100 billion recapitalisation, Deutsche Bank thinks it may be up to €375 billion.
Everything depends on the authority criteria. European governments are seeking private investment from the Middle East. However, many will have to deploy state aid. This raises the prospect of nationalisations, which in turn has led to a backlash against the recapitalisation initiative from banks and their lobby group.
WATCH OUT FOR
Germany has conceded the principle that money from the European Financial Stability Facility could be deployed in the last resort. But France doesn’t like that. It wants the right to use the fund before state aid expires and with none of the conditionality attaching to a fully-fledged bailout.