Bloomberg News

EU Banks to Boost Capital by $130 Billion, Regulator Says

February 09, 2012

(Updates with lawyer comment in third paragraph.)

Feb. 9 (Bloomberg) -- European banks plan to boost capital by about 98 billion euros ($130 billion), 26 percent more than regulators originally required, while excluding lenders in Greece and those in the midst of restructuring.

The European Banking Authority also said in an e-mailed statement it won’t subject banks to stress tests on their balance sheets this year, citing the current efforts to raise capital. The measures would result in banks reducing lending to the real economy by “less than 1 percent of the total amount” of capital raised, the EBA said.

“This says more about the headwinds that banks are expecting from the sovereign crisis,” Bob Penn, a regulatory lawyer at Allen & Overy LLP, said in a telephone interview. “If they’re girding loins for war, then that will be reflected in more conservative capital planning.”

The agency excluded all Greek banks, Dexia SA, Austria’s Oesterreichische Volksbanken AG, and Germany’s WestLB AG from the most recent calculations because they are restructuring their businesses or already under obligations tied to receiving money from the International Monetary Fund.

The EBA told European banks to raise 114.7 billion euros in fresh capital in December to respond to the sharp fall in the value of securities issued by euro-area governments. The agency also required banks to keep a core Tier-1 capital ratio of 9 percent and hold additional reserves, called a sovereign buffer, to protect against default on debt tied to weaker euro- area economies.

Optimism Reviewed

“Capital plans may be challenged and in some cases revised,” the EBA said in the statement, following a London meeting of the 27 national banking supervisors in the European Union. “If earning forecasts or other assumptions look optimistic, back-up plans will be requested.”

Banks submitted plans to raise capital in January. The EBA has said lenders aren’t allowed to reduce lending to reach the capital-ratio goals. Groups of financial supervisors are to have further meetings this month to evaluate and formally approve the plans.

The EBA said that 77 percent of the capital would be raised by “direct” measures, which include holding on to profits and dividends and converting lower-quality capital to common equity. The rest will come from changing how lenders measure the riskiness of their liabilities, the EBA said.

“The EBA might be put in a difficult spot if banks come to them and say they’ll just adjust their risk-weighted assets,” Penn said. “Risk-weighting trickery is a dark art.”

Commerzbank AG, Germany’s second-largest lender, rose 15 percent on Jan. 19 after the bank said it’s more than halfway to reaching a 5.3 billion-euro capital goal without resorting to government aid.

Banco Santander SA, Spain’s biggest bank, was required to plug a 15.3 billion-euro shortfall. Santander said Jan. 9 it met EBA’s requirements by selling stakes in South American lenders, issuing new stock in exchange for preferred equity and paying dividends in shares.

--Editors: Christopher Scinta, Peter Chapman

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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