The European Banking Authority (EBA) has recommended a plan to raise the required capital buffers of major European banks by summer 2012. This column describes how the capital targets have been calculated and outlines the main drivers of bank shortfalls with respect to these targets.
The recapitalisation package proposed by the EBA and agreed at the Summit of the Heads of State and Government of the EU requires a significant effort from banks, in light of the exceptional conditions in the financial markets in Europe. As highlighted in a joint statement by the Presidency of the ECOFIN Council and the EBA (2011): “The EU-wide recapitalisation exercise is an important element in strengthening European banks’ position in the current environment characterised by heightened systemic risk arising from the sovereign debt crisis. The increased resilience of the banking sector through higher capital levels should support banks in maintaining the ability of lending to the real economy in the EU.”
It was shown that the burden is spread across countries and is driven by different factors. On average, the higher target Core Tier 1 ratio, the conservative valuation of sovereign exposures, and the CRD III rules contribute one third each to the increased capital buffer requirements. This should provide reassurance that banks from countries perceived as weaker are not unduly penalised (even though they do bear a substantial share of the burden) and that other risks – particularly credit and market risks – are adequately captured by the buffer requirement.
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