European banks

Written by The Financial Express | Updated: Oct 28 2011, 08:41am hrs
The relief among European bank executives was palpable. With a recapitalisation target agreed at the lower end of expectations at around 106bn and a longer periodnow eight monthsto reach it, they were falling over themselves on Thursday to tell investors that they could shrink their way to compliance. Banks as various as BNP Paribas, Commerzbank and Portugals Banco Espirito Santo made clear that a mixture of reduced activity, retained profits and asset sales would be used. Resistance to tapping private or public fundingthe former would be at unattractive prices, the latter would carry constraints on dividends or bonuseswas writ large.

This, though, carries the inevitable, well-flagged risk for policymakers. Less activity by Europes largest lenders means slower economic growth. That ups the odds that programme countries (Ireland, Portugal and Greece) will slide off course, and conditions in other vulnerable economies will worsen, in turn prompting further ratings downgrades. True, Wednesday nights communiqu requires domestic authorities and the European Banking Authority to guard against excessive deleveragingbut what that means, and how they are expected to police it, is opaque.

Ahead of the summits, assessments of the required scale of the bank recap plan ranged upwards from 100bn to well over 300bnwith varying assumptions about the degree of sovereign/non-sovereign writedowns, number of banks covered, and so on, explaining the differences. By pitching at the lower end and including some leeway on capital definitions, policymakers have left no margin for error for confidence to be restoredyet their caution itself exacerbates it. Perhaps the most valuable part of the package was the unexpected call to explore options for an European Union-wide scheme to guarantee bank term funding. But, like so much of Wednesday nights statement, it was bereft of any detail. All in all, not good enough.