EU watchdog warns banks still face major challenges

LONDON: The European Banking Authority said there remained significant challenges ahead for Europe’s banks after they successfully met new requirements to bolster their core capital buffers.

The EBA said that 27 banks had hiked their combined capital by 94.4 billion euros ($116 billion) to meet the expectations of the watchdog and fill a 76 billion euro shortfall to make them strong enough to withstand the eurozone debt crisis.

EBA chairman Andrea Enria said the recapitalization had been a “necessary and important step” but cautioned that banks had a long way to go to recover from the financial crisis and comply with new global regulations.

“A lot still needs to be done. I’m very much aware this is not a silver bullet to resolve the difficult situation of the European banks,” he told Reuters.

The EBA’s recapitalization plan was part of a three-pronged approach that also deals with sovereign debt exposures and improving access to funding.

“Restoring confidence in the EU banking sector is a difficult endeavor. It’s a very complex crisis we are in and we don’t want to sound too upbeat on this,” Enria said.

“We have always said this is one component of a more comprehensive package of measures that needs to be put in place to bring stability to the European banking sector.”

Those measures include attempts by the EU to break the mutual dependency between weak banks and over-indebted sovereigns.

“We know very well that having strengthened the capital position of the banks this does not solve the problem of the interconnection of the banks and the sovereigns and does not reopen access to funding markets,” Enria said.

The EBA had given banks until the end of June to have a core capital buffer of 9 percent of risk weighted assets as part of efforts to restore confidence in Europe’s banks.

The EBA conducted a stress test of banks in July 2011, following up with a review later in the year when additional requirements were imposed on some banks.

That test had a pass mark of 5 percent core tier 1 capital, the main benchmark of a bank’s health. As the eurozone debt crisis worsened last year, a recapitalization exercise was later carried out with a tougher threshold set for lenders.

Enria said banks had come up with around 230 billion euros of capital strengthening in the past 18 months, including capital raised for last year’s stress test, the latest recapitalization and additional packages being deployed in Greece and Spain.

“The capital position is now looking much better than it was one year ago.”

The EBA said banks had complied with its latest recommendation mainly through measures such as retaining more of their earnings, issuing new equity and managing liabilities. It said the exercise had not led to a reduction in lending to households or companies or to a fire sale of assets.

The EBA further said deleveraging measures had accounted for a reduction in banks’ risk-weighted assets of only 0.6 percent.

Seven banks needed government help to meet the new threshold.

A version of this article appeared in the print edition of The Daily Star on July 12, 2012, on page 6.




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