EU banks may raise £200bn


European banks may need to raise 200bn euros

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.

Euro symbol There are concerns the crisis could spread to other highly indebted countries such as Spain and Italy

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.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 21.

    There is just one question I have and that is who is going to stump up the money required. If we are talking about the banks alone France is already saying that it can't prop up all of theirs. When we couple this with the total fund the figure on the table ranges from over 400 billion to 2 trillion. The lower is too much of a stretch the higher is just impossible. So how long does the Euro Have?

  • rate this

    Comment number 20.

    So really what your saying is, someone writes/types a list of numbers into a machine, this list is OK'ed at central bank HQ and approved, after approval of the numbers game governments then start filling the bank coffers with the interest on the massive numbers (a loan) consequently bank owners make even more profit, austerity cuts up, taxes collected and promptly given away good plan EU for who

  • rate this

    Comment number 19.

    [11] Sorry Peter, the FTSE dropped 40 points so the traders will MAKE money; when it rises 80 points tomorrow they'll MAKE MORE MONEY. Traders make money out of the wild gyrations of the market (and encourage/create those gyrations when they can). Its a big contributor to the mess we are in today.

  • Comment number 18.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 17.

    To fix the systemic problems of the Euro will cost many trillions and it is looking increasingly likely that Germany will refuse to underwrite such ludicrous sums to pay for everyone else. This was always the issue with the Euro. Germany has a stark choice: bankruptcy in the Euro, or massive prosperity outside the Euro. How much is this experiment worth to the German people who are sick of paying?

  • rate this

    Comment number 16.

    No4 linsdayfromhendon
    Your argument from the opposite direction the Greeks can no longer pay for German profiteering

  • rate this

    Comment number 15.

    Didn't Barroso say nobody else would be let off? Doesn't that contradict the mark to market idea? This is hardly very joined up.

  • rate this

    Comment number 14.

    200,000,000,000 Euros just to act as minimum back stop to insolvent banks.

    A gazilian Euros to bail out the banks bailing out the governments who bailed out the banks who enough left over to bail out the governments who will need bailing out after this bailout.

    We meet again Mister Powers.

  • rate this

    Comment number 13.

    "It would have to come from governments"

    It translates as ordinary people will have to pay for this in taxes.
    It is time to realise that although we are not in the Euro we are most certainly going to be expected to bail it out.
    Time for a referendum on European membership followed by a renegotiation of our terms of staying
    We joined this club as a means of free trade it is now a dead albatross.

  • rate this

    Comment number 12.

    Firstly what sort of capital are they talking about
    Secondly what does this mean in terms of UK banks, how much will they have to raise
    Thirdly why have EU banks not been marking to mark sovereign debt in any case - was not the point of IFRS rules that all debt had to be MTM'ed?

    Historically 10% capital cover has tended to be reasonably safe.

  • rate this

    Comment number 11.

    Must have got something right in this plan, the FTSE has dropped 40 points in the last hour so the trader boys (and girls) think their gambling is about to be curtailed.

  • rate this

    Comment number 10.

    | Give me a few minutes - and I will unpick this a bit more to make it comprehensible (well that's the plan, anyway).

    Robert, you don't need to be specific about time or whatever. you just need to say you have a plan. Or a plan for one.

  • rate this

    Comment number 9.

    With those percentages and the current volatility in sovereign debt, mark to market realistically means a lot more than €200bn.

    I suppose the little englanders will be happy thinking this is someone else's problem.

  • rate this

    Comment number 8.

    Time to accept the inevitable. There is no point giving money to a loser sitting at the roulette wheel in a casino, who is hoping to have a winning streak to be able to repay you. We need to let the old banks (and unfortunately their investors) go.

    New banks are needed, and this is where any further government/taxpayer money should be directed.

  • rate this

    Comment number 7.

    Surely you are talking more than 200bn as that sum came from a 7% ratio. Sovereign debt mark to market - well how do you calculate that except in case of Greece it is a whopping percentage.

  • rate this

    Comment number 6.


    Does this mean we have got to the end of the road (which we have been kicking the can down) and someone is FINALLY going to face the problem that trillions of pounds of alleged bank assets are worth.??

    Or will they find a way of extending the road?

  • rate this

    Comment number 5.

    Doing their bit to entrench world fascism.
    What happened to free enterprise, and capitalism?

  • rate this

    Comment number 4.

    Ze Germans have lost the desire to pay for the excesses of the rest of Europe it seems. No German money, no Euro! Interesting times.

  • rate this

    Comment number 3.

    Time to break up the EU (we thought we were voting for a free trade agreement).

  • rate this

    Comment number 2.

    Banks will have to mark-to-market their sovereign debt & sovereigns have to "help the banks raise additional capital" (i.e. give them yet more taxpayer's money).

    Two problems:
    - Sovereign debt will increase so their ratings will be further downgraded. Will this not lead to more mark-to-market losses for banks?
    - Without bank reform, will we not be back here in a couple of years?


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