EU banks may raise £200bn
- 13 October 2011
- From the section Business
The European Banking Authority is proposing that eurozone banks should hold capital equivalent to between 9% and 10% of their risk-weighted assets, on a Basel 2.5 basis, with sovereign debt in trading books and banking books marked down to market prices.
Having just read that gobbledygook, you have probably lost the will to live. So I had better explain what it means and why it matters.
Here is the translation: eurozone banks, as a group, will probably be forced to raise around 200bn euros of additional capital, if European Union governments accept the EBA's recommendations.
By the way, you have to assume the governments will do what the regulators propose, because otherwise they would risk undermining the credibility of the regulatory system.
It is a good deal of money for those banks to find. And in the case of many of those banks, they will not be able to raise it on markets. It would have to come from governments.
The French government's preference was for the new money to be provided from the eurozone bailout fund, the European Financial Stability Facility. However the Germans argued that would put too much implicit strain on the German public sector balance sheet as the biggest contributor to the fund - and therefore argued that for richer countries, such as France, the capital should come from individual governments.
As I understand it, France has more-or-less accepted the German argument.
Anyway, that's the news. Give me a few minutes - and I will unpick this a bit more to make it comprehensible (well that's the plan, anyway).
Update 10:30: So what do the EBA's tougher capital requirements mean for individual banks.
Well they imply that some very big banks would have to raise a good deal of new capital, as protection against possible future losses.
It is quite hard to be precise, because none of the banks report their current capital position on the transitional Basel 2.5 basis (ie the rules for measuring balance-sheet strength that will apply in 2015).
France's Soc Gen and BNP Paribas, Germany's Deutsche and Commerzbank, and Italy's Unicredit would collectively be short of many tens of billions of euros of capital.
The biggest Spanish banks would probably have to raise a bit less.
And, of course, in Greece and Portugal the capital deficits would look very large indeed.
All of which implies that the bailout fund, the European Financial Stability Facility, would be required for the recapitalisation of Greek and Portuguese banks, and also - probably - Italian banks.
The French and German governments should be able to provide the funds to any of their banks unable to raise the needed capital from commercial investors.
As for Spanish banks, they seem to me to be on the cusp between needing bailout-fund money or muddling through with help from the Spanish government and the market.
So what does it mean for British banks?
Well, by European standards, they have relatively low exposure to the debts of the Greek, Portuguese, Spanish and Italian governments - and their low quality Irish debt is in the form of loans to developers and homeowners.
Also, as I mentioned last Friday, Royal Bank of Scotland has what is known as contingent capital, or a contractual arrangement with the Treasury that it can call on taxpayers again for capital in a crisis - and this contingent capital should in some ways be seen by regulators as helping RBS to meet the new capital requirements (because future taxpayer help is guaranteed).
All of which is a long-winded way of saying that UK banks should be able to meet the new capital standard without taxpayers having to inject any new money.
If they turn out to be a bit short of capital, they should be able to find what they need either through selling assets or through raising money from investors.
PS The big question for eurozone governments is whether to force the banks to fill their capital deficits by raising capital - or whether it will allow them to meet the required higher ratios of capital to assets by shrinking their assets.
In an economic sense, this matters enormously.
If banks are allowed to shrink their assets, if they are permitted to reduce the size of their balance sheets, many will do this by lending less - which could be an economic disaster at a time when the eurozone economy is dangerously close to recession.
Update 10:51: Morgan Stanley estimates that if banks are given time and discretion about how they can meet the new capital requirements, their balance sheets could shrink by 2 trillion euros - which would almost certainly lead to a credit crunch, a credit shortage for businesses and households.
And that would be a disaster for a weak eurozone economy.