By Patrick Jenkins and Brooke Masters
The European Banking Authority is to challenge a significant proportion of the capital restructuring plans put forward by some of the continent?s leading banks to meet tough new capital requirements, say three people familiar with the process.
The regulator said in December that 30 banks needed to boost capital by an aggregate 115bn euros to reach a 9 per cent target for core tier one capital, a key measure of financial strength.
The banks were given until January 27 to submit plans to the EBA, via national regulators, outlining how they would meet the requirement. The plans will be discussed by the EBA board next week.
According to one person close to the process, as much as half of the measures outlined in those plans do not look credible. There are two particularly contentious tactics being employed – shifting the way in which a bank calculates the risk-weighting of its assets; and promising asset sales that are unlikely to attract buyers. Projected profits for the period to June also appeared overconfident in some cases, given the worsening outlook for the eurozone economy.
Some officials said privately last month they expected Germany?s Commerzbank, which had an EBA stress test shortfall of 5.3bn euros, and Italy?s Monte dei Paschi di Siena, with a 3.3bn-euro shortfall, to find it difficult to meet the requirements without state aid. Since then, Commerzbank has claimed it has generated 3bn euros of fresh capital. On Friday, BaFin, Germany?s national regulator echoed that.
Only Italy?s UniCredit has opted for a rights issue to raise capital. All other banks have come up with a combination of asset sales, risk-weighting recalculations, profit retention projections and so-called liability management exercises, involving the buying back of debt that is trading below par values, a process that triggers an immediate capital gain.
The EBA stress tests, and the capital deficits the regulator identified, have triggered vociferous complaints from banks. Politicians, particularly in Italy and Germany, and national regulators have expressed doubts about the exercise and the danger that it could exacerbate a credit crunch.
Against that background, the EBA appears to have shown a growing willingness to compromise on the details of the capital restructuring process.
The regulator plans to monitor asset sales to ensure that they are not damaging to the economy and may allow banks some flexibility on the timing to help avoid fire sales. However, the sales cannot be put off indefinitely, people familiar with the process warned.
They also say that while some risk-weighting changes may be aggressive, many are likely to be perfectly
legitimate.
? The Financial Times Limited 2012