24 February 2015

Financial Times: Europe’s big banks will need to raise capital warns ECB

Some of the eurozone’s biggest banks will need to raise more equity because of a clampdown on national exceptions to capital rules, the eurozone’s chief banking supervisor has forecast.

“Some banks still have to get more capital,” Ms Nouy, a former French central banker appointed last year to head the European Central Bank’s Single Supervisory Mechanism, said in an interview on Tuesday.

“It’s not so much about how much [capital] it’s about the definition of capital. There are too many, in my view, national options in the definition of capital in Europe and we have to address that. [ . . .] We may have to go to the legislature, to the European Parliament, to ask for more harmonisation in regulation.”

Eurozone banks have recently been given updated capital targets by the SSM, which call for them to strengthen their balance sheets based on the results of last year’s ECB stress tests and asset quality review.

 “Top of the SSM’s agenda is standardisation of national discretions — they want to stop all that,” said one senior European banking executive. “There are questions about the quality of capital at Spanish banks, but also Greek and Italian banks.”

But the SSM does not consider this “high-quality capital” as it relies on the states’ ability to repay the deferred tax assets if the banks were to collapse. Bankers said Ms Nouy’s agency had signalled that it would increase bank-specific capital buffers, called Pillar 2 requirements, to adjust for perceived weak capital areas.

“The SSM is seen as pretty robust,” said one investment banker who advises several large European lenders. “For the first time their regulator doesn’t speak their language.”

While about 80 per cent of the rules dictating capital are set at EU level, the 19 different countries across the currency bloc have discretion for the remaining fifth. Harmonisation of the rules would see banks’ accounts particularly hit in the areas of goodwill and how they model for credit and operational risk, as well as specific areas such as deferred-tax assets.

Full article on Financial Times (subscription required)

© Financial Times