by Paolo Bisio, Demelza Jurcevic and Mario Quagliariello
December 21, 2011
In a bid to restore stability and confidence in the markets, the European Banking Authority (EBA) has recommended a plan to raise the required capital buffers of major European banks by summer 2012. This column, by economists at the EBA, describes how the capital targets have been calculated and outlines the main drivers of bank shortfalls with respect to these targets.
On 26 October 2011, the European Council agreed a comprehensive package aimed at addressing the deterioration of macroeconomic and market conditions. The package, which aims at restoring stability and confidence in the markets, includes a recapitalisation plan for major EU banks as proposed by the European Banking Authority (EBA). These measures are also in line with the European Systemic Risk Board (2011) Press Statement on the need for coordinated efforts to strengthen banks’ capital as well as for a transparent and consistent valuation of sovereign exposures.1
On 8 December, the EBA (2011a) adopted a recommendation that national supervisory authorities (NSAs) should require banks to strengthen their capital positions by building up an “exceptional and temporary capital buffer” such that the Core Tier 1 capital ratio (i.e. the ratio of Core Tier 1 capital over risk-weighted assets) reaches a level of 9% by the end of June 2012, after a prudent valuation of sovereign debt exposures to reflect market prices as at the end of September. As clarified by the EBA, the buffer is explicitly not designed to cover losses in sovereign exposures, but to provide a reassurance to markets about the banks’ ability to withstand a range of shocks and still maintain adequate capital.
Based on the public information disclosed by the EBA, this column describes how the capital needs have been computed and illustrates the main drivers of banks’ shortfalls with respect to the target capital level.