Banks rebuff EU calls for higher capital

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European banks have issued a sharply worded warning to EU leaders over the escalating debt crisis after the European Commission urged them this week to buffer capital levels or face pay cuts.

Before a crucial meeting of leaders in Brussels on 23 October, banks have rebuffed calls for increased capital levels after renewed stress tests are expected to reveal weaker balance sheets.

The lenders face capital requirements as high as 9%, according to plans unveiled by European Commission President José Manuel Barroso on 12 October to steer banks through the bloc's debt woes.

“Systemic banks lacking capital should first seek market finance, tap their own governments and if that fails and draw on the European rescue fund only as the ultimate backstop," Barroso said. Reports yesterday said banks would have a further six months to boost balance sheets.

An EU official told the press yesterday (13 October) that banks which were short of the capital required face salary and bonus caps until they could hit the target.

The European banking lobby issued a statement today (14 October) expressing dismay at having to up capital levels in too short a time-frame and under difficult market conditions.

"It may not be easy to  find those additional funds on the open market in the current climate of decreasing profitability with a threat of restricting disbursements to investors and the absence of a clear path from governments," Guido Ravoet from the European Banking Federation (EBF) said in the statement.

At least 66 of Europe’s biggest banks would fail fresh stress tests currently under way, according to analysts from Credit Suisse. The analysts forecast that the 66 would need to raise 220 billion euros in scenarios of severe mark-downs in the value of sovereign debt.

Only eight banks out of about 90 tested failed the July stress test, with a combined capital hole of 2.5 billion euros. The minimum pass level was 5%.

“European banks feel they are being held hostage by the sovereign debt crisis,” Ravoet said.

In Germany, the five main banking associations wrote a letter to the country's finance minister Wolfgang Schauble warning against stress tests that would ultimately create “self-fulfilling prophecies that exacerbate the crisis."

In the EBF's letter, Ravoet stressed that European banks have continued to make credit available to national governments throughout the crisis while rebuilding their books and upping capital levels. The lobby renewed calls on leaders to get a handle on the debt crisis as soon as possible.

“We have already asked for immediate clarity and decisive action and we hope that the upcoming Summit of 23 October will help find viable solutions,” the statement read. 

The Capital Requirements Directive (CRD), adopted in 2006, is currently undergoing its fourth review at the European Commission (EURACTIV 01/03/10).

In July, Germany was the only member of the Basel Committee of banking supervisors and central bankers, to refuse to endorse draft rules on new minimum levels of capital which banks will have to hold.

Meanwhile, on 7 July 2010, the European Parliament adopted the EU's third round of revisions to the CRD, requiring banks to adopt new policies on the structure, amount and timing of bonus payments to prevent traders from underwriting risky deals in order to boost their salaries.  

The new principles go beyond the recommendations of the G20's Financial Stability Board, because they impose limits on cash bonuses, require a partial deferral of bonuses and place a cap on their amount relative to fixed salaries.

Today's announcement will be the fourth revision of the bloc's Capital Requirements Directive after the European Parliament approved CRD III early this summer.

  • 23 Oct.: EU leaders meet in Brussels to discuss solutions to Europe's banking and debt woes

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