Bloomberg News

EU May Consider Relaxing Rule on Banks for Sovereign Buffer

February 09, 2012

(Updates with Barnier statement in 10th paragraph.)

Feb. 6 (Bloomberg) -- European bank supervisors may discuss easing requirements for lenders to hold capital against sovereign debt this week as part of more than 30 meetings this month to track banks’ progress in complying with updated requirements, two people with knowledge of the discussions said.

Regulators will meet this week at the European Banking Authority in London to review capital rules issued in December. National supervisors will probably discuss the so-called sovereign buffer, according to one of the people, a senior EU official who declined to be identified because the talks are private.

The EBA told banks to raise 114.7 billion euros ($150 billion) in fresh capital by the end of June as part of measures introduced to respond to the sharp fall in the value of securities issued by euro-area governments. The EBA required banks to keep a core Tier-1 capital ratio of 9 percent and hold additional reserves, called a sovereign buffer, against the debt of weaker euro-area countries, based upon the market price of the bonds.

“Calculating the capital needs on the basis of very volatile sovereign yields wasn’t the right thing,” Nicolas Veron, a senior fellow at Bruegel, a Brussels-based economics research group, said in a phone interview. “This is the result of political negotiating and it’s not right to blame the EBA.”

Buffering

A decision to alter the sovereign buffer would be made in conjunction with the European Systemic Risk Board, a group of European central bankers responsible for monitoring market risk, one of the people said.

The “need to maintain this buffer, and its size, will be reviewed if and when the policy measures to fight the sovereign- debt crisis have an effect on the price of government bonds,” EBA Chairman Andrea Enria said in a speech in Rome last month.

Sony Kapoor, managing director at Re-Define, a firm that advises governments on economic policy said “once a sovereign buffer like this has been included, it’s very hard to put the genie back in the bottle.”

The cost of insuring against default on European sovereign debt has fallen since December, according to traders of credit- default swaps.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined three basis points to 323 basis points today.

‘Restoring Confidence’

“This exercise is essential” to help restore confidence in the European banking sector, said Michel Barnier, the European Union’s financial services commissioner. “At the same time, the exercise is being conducted in a way to ensure continued access to finance for the EU real economy.”

Banks submitted their plans to raise capital in January and the EBA said in December that lenders aren’t allowed to reduce lending to hit the capital ratios.

Groups of national regulators that oversee Europe’s largest cross-border banks are scheduled to hold 31 meetings this month to decide whether the banks’ proposals comply with EBA guidelines, one of the people said.

“The overwhelming majority of measures outlined in the plans appear to be, in aggregate, in line with the spirit and the letter of the EBA’s recommendation,” the agency said in an e-mailed statement today.

The Financial Times had reported that the EBA would challenge as many as half of the plans.

Shares in 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.

Spanish lenders must raise 26.2 billion euros in core Tier 1 capital, the EBA said in December, more than any other European country. 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: Anthony Aarons, Christopher Scinta

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

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


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