Thursday, September 29, 2011

European banks: Holey grail

October 1, 2011

The fire raging in Europe’s financial system is growing fiercer by the day. Banks across the region have been unable to sell any long-term unsecured bonds since early July. Short-term markets have also been closing to some banks. A few large corporations prescient enough to have their own banking licences are depositing their cash directly with the European Central Bank rather than entrusting it to banks. An obvious step to douse the flames would be to recapitalise European banks. Yet by how much and with what capital?

Global regulations are already forcing banks to plump up their cushions significantly. Nomura reckons that simply getting banks to comply with the new Basel 3 rules, plus an additional surcharge on globally important banks, could leave European lenders, Britain’s included, needing to raise more than €100 billion ($136 billion). In theory banks have until 2019 to raise this amount, and much of it could come from profits over the next few years. But investors are impatient and are pressing banks to reach those levels sooner.

On top of this requirement is the extra capital that banks would need to absorb losses from a recession or the debt crisis. Such calculations depend on lots of assumptions, from the amount of capital that banks ought to hold to the precise nature of any euro-zone write-downs. “The key issue is what scenario the banks would need to be recapped for,” says Huw van Steenis of Morgan Stanley. “A soft restructuring in just Greece? Or restructuring in multiple peripheral countries?”


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