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EU lenders boost capital by more than required

by Renee Cordes in Brussels | Published July 11, 2012 at 3:21 PM

European lenders boosted their capital reserves by a greater-than-needed €94.4 billion ($115.7 billion) as of last month, according to figures released Wednesday, July 11, by the European Banking Authority.

The amount raised by 27 banks surpasses the €76 billion shortfall identified last December by the agency, which gave lenders until June 30 to achieve a core Tier-1 capital ratio of 9%. It also ordered them to hold additional reserves, known as a sovereign buffer, to protect against falling bond prices among euro-area nations.

In Wednesday's preliminary progress report, the London-based agency found that the "vast majority" of lenders met the 9% requirement.

"Our work in strengthening the capital base of European banks is proceeding to plan," said Andrea Enria, the EBA's chairman, in a statement. "European banks are now in a stronger position, which should support lending to the real economy and gradually restore banks' access to market funding," he said.

He added: "Significant challenges remain to exit the crisis and comply with the new regulatory standards approved by the G20, but this was a necessary and important step in the process of repairing banks' balance sheets across the EU."

But many observers took a more tempered view, judging that it will take some time while to restore the European banking system to solid footing.

"I think the number show that European banks, in general, are much sounder or better than their reputation," said Carsten Brzeski, senior economist at ING Bank SA/NV in Brussels. "At the same time, however, past experience has told us to be cautious when interpreting EBA numbers. Positive results from EBA stress tests in the past have not prevented bank recapitalizations in Ireland and Spain."

The EBA underscores that the recapitalization exercise is different from a stress test, since it uses actual, not stressed, figures, and entails a requirement to establish a buffer of high-quality capital above minimum regulatory requirements.

A total of 71 lenders took part in the capital exercise, of which 31 -- excluding Greek lenders -- fell short of the 9% requirement after including the sovereign buffer.

In December, the EBA told lenders that fell short to come up with €114.7 billion in fresh capital but the amount required dropped to €76 billion after four of the lenders were dropped from the program due to deep restructuring. Three of them -- Dexia SA of France and Belgium, Austria's Österreicische Volksbank AG and Germany's WestLB AG -- are in the midst of winding down operations.

The EBA, which identified a €30 billion shortfall for Greek lenders in December, said that their capital needs will be met through the International Monetary Fund bailout.

Spain's Bankia SA, also part of the original sample but since bailed out by Madrid, will monitored by Spanish authorities in conjunction with the European Commission liaising with the European Central Bank, the EBA and the IMF, the EBA said Wednesday.

Earlier this week the Commission gave its initial nod to the Bankia bailout, promising to re-examine the situation in six months when Madrid submits a restructuring plan for its fourth-largest lender.

Interestingly, Wednesday's report showed that banks were able to raise capital without being forced to reduce lending to households or sell assets on the cheap, as many critics had feared. They came up with €71.6 billion of the €94.4 billion total through so-called direct capital measures, including selling shares and converting lower-quality hybrid capital into common equity.

The EBA gave only comprehensive recapitalization figures for all the lenders in the sample, but said it would release final figures and details on a bank-by-bank basis in September.

The agency also promised to work with national banking supervisors to monitor lenders included in the sample. Where necessary, national supervisors are at liberty to conduct a detailed review of individual lenders' asset quality.

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