Bloomberg News

European Bank Capitalization Plan Enough, Basel Head Says

October 28, 2011

(Updates with comment from bank group in fifth paragraph.)

Oct. 28 (Bloomberg) -- European regulators’ plan to force some banks to hold 9 percent in core reserves after sovereign debt writedowns will probably be enough to protect lenders from insolvency, said Stefan Ingves, chairman of the Basel Committee on Banking Supervision.

The measures are also a prerequisite for growth to pick up as Europe slowly recovers from a crisis in confidence prompted by high public debt levels in many countries, he said.

If banks have “valued their assets correctly, and in this case it’s about valuing government bonds at market value, then something very different and extraordinary that we don’t know about today, must happen for 9 percent not to be enough,” Ingves said in an interview late yesterday. EU leaders “will work through” the debt crisis “step by step,” said Ingves, who is also the governor of the Swedish central bank.

European leaders this week struck an agreement to bolster their toolbox for dealing with the region’s sovereign debt crisis. Europe’s currency, stocks and bonds rose after 10 hours of talks ended in Brussels with governments boosting the heft of their rescue fund to 1 trillion euros ($1.4 trillion) and persuading bondholders to take 50 percent losses on Greek debt. Measures also included a recapitalization of the region’s banks and a potentially bigger role for the International Monetary Fund in strengthening the bailout fund.

‘Small Number’

A “fairly small number” of banks is likely to need government support to reach the 9 percent capital target, said Christian Clausen, president of the European Banking Federation and chief executive officer of Nordea Bank AB, to reporters today in Brussels. While the higher capital threshold is in principle temporary, Clausen said he expected it to stay in place until it is superseded by new capital rules that have been agreed on by the Basel committee. These rules, known as Basel III, will be fully applied to banks from Jan. 1 2019.

The agreement on recapitalization includes forcing a total of 70 banks to raise their level of core capital to 9 percent after writing down their sovereign debt holdings in line with their market value. Lenders will need to raise 106 billion euros ($150 billion) in fresh reserves to meet the requirement, the European Banking Authority said. The 70 lenders will be required to reach the 9 percent capital threshold by the end of June 2012, it said.

‘Not Functioning’

The EBA coordinates the work of national banking regulators in the 27-nation EU.

“We have a banking system that today is not functioning and in such a world it’s better to recapitalize the banks than not do it because with too little capital, nothing will happen in the banks and it’s better if they have a lot of capital,” Ingves said. “Nine percent is a very reasonable level.”

Sweden’s financial regulator says Svenska Handelsbanken AB and Swedbank AB, the country’s two largest mortgage lenders, need to boost capital by 9.7 billion kronor ($1.5 billion) and 2.9 billion kronor, respectively, to meet its capital requirement. The EBA’s use of transitional rules penalizes mortgage assets relative to their treatment by Swedish regulators, the Financial Supervisory Authority said.

Stress Tests

Swedish lenders sailed through the EBA’s July stress tests, while credit and equity markets suggest investors deem the country’s banks to be some of the safest in Europe.

The increased capital is something Swedish banks will have to accept for the sake of European stability, Ingves said.

“If one looks at Handelsbanken’s ability to make money it should not be a major problem for them” to raise its capital to EBA levels, Ingves said. “It’s important that the exact same rules are applied in all of Europe since a discussion has arisen about how banks in various countries are functioning or, in some countries, not functioning, so that we once and for all erase the uncertainty that this creates.”

--With assistance from Adam Ewing in Stockholm. Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net


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