Resilience of banks
Some banks need to attract additional capital buffers for their European sovereign exposure. This is part of a broader package of measures aimed at addressing the European debt problem. At the same time, the capital quality requirements are being tightened up. By the end of June 2012, a bank’s capital buffer must meet a core Tier 1 ratio of 9%, taking into account the market value of exposures to European governments. This ratio only includes capital of the highest quality. The aim of the recapitalisation exercise is to restore the financial resilience of banks. At the end of June, the European Banking Authority (EBA) will carry out a new review of the capital position of the participating banks.
Concerns about deleveraging
The temporary increase in capital requirements and the weakened funding market for banks is giving rise to concerns about possible deleveraging by European banks. This is not, however, to suggest that all forms of deleveraging should be worrisome. On the contrary, the new capital requirements and the restructuring of banks are even making some forms of deleveraging necessary. The EBA has therefore issued instructions on how the banks taking part in the recapitalisation should make up a potential capital shortfall.
Banks that had a core tier 1 ratio of less than 9% at the end of 2011 have now strengthened their position, mainly with direct capital. This was revealed by an interim analysis compiled by the national regulatory authorities and EBA. The analysis concluded that these banks had made up their deficits almost entirely (96%) through planned capital measures, and the remainder through a decrease in the balance sheet total as part of their restructuring plans, for example in the context of European state support requirements.
For more information visit EBA and recapitalisation