Bloomberg News

EU Banks May Need $186 Billion of Capital, Morgan Stanley Says

October 05, 2011

Oct. 5 (Bloomberg) -- European banks may need more than 140 billion euros ($186 billion) of capital through a program similar to the U.S. Troubled Asset Relief Program, Morgan Stanley analysts estimated.

“Policy makers increasingly want to build a large solvency buffer,” the analysts led by Huw van Steenis said in a note today. “We think banks in core Europe need to be recession proofed and banks in the periphery depression proofed.”

That may require recapitalizing banks in core European countries to an 8 percent core Tier 1 capital level and to 12 percent in countries like Greece, Ireland and Portugal after applying European Banking Authority stress tests and a 50 percent writedown on sovereign Greek debt, they said.

European Union finance ministers have a “sense of urgency,” and a “shared view” of the need for a “concerted, coordinated approach in Europe” on bank recapitalization, EU Commissioner for Economic Affairs Olli Rehn told the Financial Times. The $700-billion TARP was started in 2008 to inject capital into banks after the collapse of the U.S. housing market and the bankruptcy of Lehman Brothers Holdings Inc.

Recapitalization of banks in Europe may include some “convertibility features,” Morgan Stanley analysts said, adding that for example convertible instruments could be issued that become core Tier 1 capital if government aid isn’t repaid and the bank doesn’t reach a pre-determined capital level within three years.

“This is less dilutive for banks if it allows them to recap in a more orderly fashion when there is less stress in the markets,” the analysts said. Relief for bank funding stress is also needed to “reassure credit and equity markets,” they said.

Some of the biggest U.S. lenders, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. received TARP money in the wake of the subprime mortgage crisis.

--Editors: Dylan Griffiths, Keith Campbell.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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