Europe’s biggest banks would need up to €26bn in new capital — hurting their ability to lend and pay dividends — if regulators’ efforts to level the playing field for the industry succeed, a new report has warned.
The European Central Bank has spent much of its first year as the eurozone’s banking regulator examining ways to stamp out national discretion that allows banks across 19 countries to calculate their capital differently.
The Basel Committee on Banking Supervision is separately working on proposals that will limit banks’ room to manoeuvre in a variety of areas including how mortgages and trading assets affect key capital ratio calculations. [...]
Mr Abouhossein’s team found that the anticipated rule changes would reduce the combined Common Equity Tier 1 (CET1) ratios of the 35 banks by 1.5 percentage points by 2018. That is the equivalent of €137bn of their capital being destroyed.
JPMorgan’s report focuses on what the bank thinks investors — rather than regulators — will demand. By that measure, 13 banks will fall short by €26.4bn. Most banks target CET1 ratios of 10 to 15 per cent, well above regulatory minimums.
“You have a choice. You can run at lower capital levels than the market is comfortable with, that means you will trade at a discount,” said Mr Abouhossein.
Banks could address much of the shortfall by shrinking their balance sheets, reclassifying some financial assets and retaining more of their profits, JPMorgan said. [...]
Mr Abouhossein said any bank whose predicted shortfall was more than 5 per cent of its market value would prompt investor concerns and would trade at a discount. That group includes France’s Crédit Agricole, Société Générale and Natixis, Italy’s UniCredit, and Spain’s Santander .
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