Bloomberg News

EU Says Bank Losses Could Be 400 Billion Euros in Deeper Slump

October 01, 2009

European Union banks could have losses of almost 400 billion euros ($582 billion) this year and next under stress tests that laid out a deeper economic downturn than the region is currently experiencing, a report to EU finance chiefs showed.

Under current EU economic forecasts for 2009 and 2010, the largest banks in the region would maintain an average Tier 1 capital ratio “well above” 9 percent, the officials said today in a statement after meeting in Gothenburg, Sweden. A “more adverse” scenario would increase losses and cut the average to about 8 percent.

The five-month study was ordered by ministers after a similar one in the U.S. European Central Bank President Jean-Claude Trichet emphasized that the potential losses for the region’s 22 largest banks represents an “adverse” scenario and not a base-line case.

“Even with this tough stress testing, we see that our system is resisting in way that’s reassuring,” he said at a press conference. “We are still drawing the lessons of the previous drama and current tensions that we are still experiencing.”

No bank among the 22 included in the test would see its Tier 1 capital ratio fall below 6 percent as a result of the adverse scenario, according to the statement. The minimum Tier 1 capital requirement for banks under the Basel accords is 4 percent.

‘Important Support’

“This resilience of the banking system reflects the recent increase in earnings forecasts and, to a large extent, the important support currently provided by the public sector to the banking institutions,” the officials said, referring to capital injections and asset guarantees.

European financial institutions have so far posted $498 billion in losses since the onset of the credit crunch in mid-2007, less than half the $1.08 trillion in losses reported in the U.S., according to Bloomberg data.

U.S. regulators found earlier this year that 10 financial companies led by Bank of America Corp. needed to raise a total of $74.6 billion of capital, in results made public on May 8. Releasing the findings helped calm investors, U.S. Comptroller of the Currency John Dugan, who oversees national banks, said at the time.

Trichet and other officials said the methodology used in the report, which was prepared by the Committee of European Banking Supervisors, differed from that used by U.S. authorities and the International Monetary Fund. The divergence in part reflects different accounting standards, they said.

Capital Reserves

The EU didn’t publish the names of the banks it studied.

Bank capital reserves will still have to improve to strengthen the financial system, according to Bundesbank President Axel Weber.

“In the future, not only the quality but also the level of banks’ capital has to increase in order to make them more resilient,” Weber said.

The finance chiefs intend to make stressing routine and possibly annual. “We would like such tests to be published regularly,” French Finance Minister Christine Lagarde told journalists.

The Brussels-based Bruegel research group urged the ministers to set a deadline for member states to withdraw credit guarantees for banks to spur them to raise new capital and write off bad loans.

‘Matter of Urgency’

“Bank recapitalization and restructuring should be completed in all EU countries as a matter of urgency,” the institute said today in a report on post-crisis exit strategies. To encourage this, governments should “agree on a timetable and firm deadlines for termination of government guarantees.”

The Group of 20, which includes the EU’s Britain, France, Germany and Italy, committed last week to conducting “robust, transparent stress tests as needed” and called on banks to retain a greater portion of current profits to bolster capital.

----With assistance from Simone Meier, Kim McLaughlin, Jana Randow, Niklas Magnusson, Jeffrey Donovan, Chris Burns and Agnes Lovasz in Gothenburg. Editor: Jones Hayden

To contact the reporters on this story: Mark Deen in Gothenburg at markdeen@bloomberg.net; Svenja O’Donnell in Gothenburg at sodonnell@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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