Bloomberg News

Banks Getting EU Aid Would Have to Restructure, Paper Shows

October 20, 2011

(Updates with stress tests in seventh paragraph. See EXT4 for more on the euro-area financial crisis.)

Oct. 20 (Bloomberg) -- Banks that need aid from Europe’s 440 billion-euro ($606 billion) rescue fund must be restructured as a condition for receiving capital, according to draft guidelines obtained by Bloomberg News.

The European Financial Stability Facility would provide loans to national governments that in turn would inject the capital into lenders deemed to pose systemic risk, according to the European Union working paper. The draft stems from a July 21 agreement in Brussels to enhance the scope of the EFSF fund in a bid to tackle Europe’s sovereign debt crisis.

German Chancellor Angela Merkel has pledged to do “everything necessary” to ensure that Europe’s banks have enough capital to withstand market turmoil amid growing concern that Greece is headed for a default. Boosting banks’ resilience is part of a wider plan scheduled to be announced on Oct. 23 to stamp out the debt crisis, which has roiled global markets and dented confidence in the survival of the 17-nation currency.

“Experience has shown that some governments may not have large enough resources, especially where the size of the financial sector is large relative to the size of the economy,” according to the paper. “In these cases, the new tool may serve as the last-resort instrument to preserve financial stability.”

June Deadline

Banks should first seek capital from their owners and secondly from national governments, followed by the European aid fund, the paper says.

German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee yesterday that he expects a deadline of June 30, 2012, for European banks to meet increased capital levels, said two lawmakers who attended the meeting. The lenders will need to hold minimum core tier 1 capital, a measure of financial strength, of 9 percent by that deadline, the lawmakers said, speaking on condition of anonymity.

The European Banking Authority is assessing whether banks could withstand sovereign debt writedowns, a person familiar with the talks said on Oct. 12. The region’s lenders may need a total of 243 billion euros using the EBA’s calculation method, JPMorgan Chase & Co. analysts led by Kian Abouhossein wrote in a note to clients yesterday.

Stress Testing

The eligibility of a bank to receive EFSF funds via a loan to the national government will be determined by stress testing, the paper said. This examination could include a first estimate because of timing constraints and then followed by a more comprehensive analysis.

“As a rule, every beneficiary institution will be subject to a restructuring plan commensurate with the extent of the financial support received,” according to the draft. “The objectives of these rules are to limit, to the maximum, the distortion of competition while at the same time ensuring the long-term viability of the aided institution, all while keeping in mind the ultimate goal of preserving financial stability.”

Adherence to the conditions set by state-aid rules may include on-site inspections of the banks by European authorities, according to the paper. Another requirement may also include opening the domestic market to foreign ownership and entry, the paper says. Any profit from the recapitalization must be used to help repay the aid.

In parallel to the bank recapitalization plans, European leaders are debating whether to push Greece’s bondholders to accept losses on the country’s sovereign debt that go beyond the roughly 21 percent agreed on in July.

--With assistance from Aaron Kirchfeld and Angela Cullen in Frankfurt. Editors: Patrick G. Henry, Jones Hayden

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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