From The Sunday Times
December 20, 2009
European banks face capital crisis
Iain Dey
Europe’s biggest banks may have to raise as much as £400 billion over the next two years to meet stringent new capital rules being imposed on the sector, according to banking sources.
A sweeping overhaul of international banking regulation proposed last week by the Basel committee of global bank supervisors called for banks to hold more cash in reserve to prevent future crises.
Analysts have estimated that the new rules could create a shortfall of about £280 billion for European institutions. However, sources close to negotiations with the Basel committee insist that the real number is much higher.
British banks alone are estimated to need about £50 billion of additional capital under the new rules, according to Credit Suisse research. The British taxpayer has already pumped about £63 billion into Royal Bank of Scotland and Lloyds.
A number of large European banks are already working on fundraising plans that will be unveiled early in the new year, according to banking sources. Unicredit of Italy is expected to press ahead with a €4 billion (£3.6 billion) share issue early in the new year.
Many European banks are thought to have been undercapitalised even before the introduction of the new rules.
Baroness Vadera, the former minister who was a key architect of Britain’s bank bailouts, warned recently that some of the biggest financial institutions in Europe have yet to “come clean” on their losses.
Although the Basel rules apply globally, the way they are drafted will hit European banks hardest. America’s big banks have built higher stores of capital than most of their global peers via emergency credit-crunch fundraisings.
The scale of the potential capital shortfall emphasises the extent of the damage inflicted on bank balance sheets by the credit crunch. However, if the rules are implemented in their current form it could undermine global economic recovery, bankers have warned.
If banks are forced to hold more capital on their balance sheets they will have less cash to lend to businesses and personal customers.
Angela Knight, chief executive of the British Bankers’ Association, said: “Over 2009 the message has been about banks holding more capital, better capital, and having more liquidity — safety and security. That’s been absolutely the correct emphasis. As we go into 2010 we need to start looking at how we stimulate growth in the economy.”
The new rules on bank capital come in addition to continuing pressures on banks to find new sources of funding. Over the next five years UK banks, excluding HSBC, have to refinance almost £1 trillion of loans from the financial markets, according to the Bank of England’s latest Financial Stability Review.
About one-third of the total sum due to be refinanced is linked to government-backed funding schemes such as the Bank of England’s special liquidity scheme. |
