European banks must submit their recapitalization plans to regulators by Friday, the deadline set by the European Banking Authority as part of efforts to strengthen banks’ core capital reserves by a combined 115 billion euros.
European institutions must raise their core Tier 1 capital ratios, which determine a bank’s ability to weather financial shocks, to 9 percent by June 2012. Banks must provide authorities with guidance on how they expect to raise the extra cash by the end of today. The plans will be reviewed by the EBA, which has the power to veto any recapitalization strategies, in early February.
Thirty-one European banks were found to have a combined 115 billion-euro shortfall in December stress tests conducting by the EBA. The worst offenders were Spanish, German, and Italian banks.
The EBA identified Spain as the country with the biggest capital shortfall. To raise capital, Spanish banks have opted for asset sales, reducing lending, and manipulating risk weightings.
Grupo Santander of Spain, which must raise 15 billion euros, the most of any European bank, has already reached its target by converting 6.8 billion euros in bonds into shares, retaining profits, and selling a stake in its Brazilian unit to an outside investor.
Commerzbank of Germany, which must raise 5.3 billion euros by June, is already more than halfway to meeting the new requirements, and expects to raise the rest through a combination of reducing assets on its balance sheet and retaining future earnings.
Most banks have avoided using capital markets to raise the extra reserves, and are awaiting the results of Italian bank UniCredit’s 7.5 billion-euro rights offerings, which allow existing shareholders to buy new stock in a company at a discount.
So far, only UniCredit has launched a rights issue, while most banks have opted to shrink their loan portfolios — a far simpler option, but one that could potentially trigger a credit crunch.
To contact the reporter on this story: Emily Knapp at email@example.com
To contact the editor responsible for this story: Damien Hoffman at firstname.lastname@example.org