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EU Set to Speed Up Recapitalization of 16 Banks

European officials look set to speed up plans to recapitalize the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a coordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

Euro coin in front of the giant symbol of the Euro outside the headquarters of the European Central Bank.
Thomas Lohnes | AFP | Getty Images
Euro coin in front of the giant symbol of the Euro outside the headquarters of the European Central Bank.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately.

Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way.

The move would affect mostly mid-tier banks. Seven are Spanish, two are from Germany, Greece and Portugal, and one each from Italy, Cyprus and Slovenia. The list includes Germany’s HSH Nordbank and Banco Popolare of Italy.

When the European Banking Authority, the new pan-EU supervisor, tested 91 banks against a stressed economic scenario — including rating downgrades of sovereign debt — nine banks failed and were told to raise more capital by the end of December.

The 16 institutions that are now the focus of attention ended up with core tier-one capital ratios — the key measure of financial strength — of 5 percent to 6 percent. The pass mark was 5 percent. The EBA had given those banks until April 2012 to implement plans to shore up their capital buffers.

While the banks are expected to turn to private markets first, officials said that state aid may be required.

The French government appears to favor using the new 440 billion euro (US$591.7 billion) rescue fund, known as the European financial stability fund, but other member states are likely to argue for national action.

Joaquín Almunia, the EU competition commissioner, last week extended the special regime for state aid to banks that was set up in the 2008 crisis to allow governments to pump soft loans and guarantees into failing banks.

The EU internal markets commissioner, Michel Barnier, said the 16 banks that nearly failed the stress tests “are judged to be fragile and must also be strengthened further. We want the recapitalization for these banks to be by private means. The era of bailing out banks must end. But I cannot, of course, exclude the possibility that some of the above banks will require state aid.”

An EBA spokeswoman said, “The EBA is working with [national supervisors] to ensure a co-ordinated approach in identifying and addressing such capital needs ... [and] will be reviewing the actions undertaken by those banks.”

Banks that did better in the stress tests but are not yet in compliance with the tough new capital requirements agreed last winter by global regulators will be expected to accelerate their “march towards the Basel III ratios”, the French official said.

The Basel III agreement gives banks until 2019 to be fully compliant.

The other 14 banks on the list are: Espirito Santo and Banco Portugues of Portugal; Piraeus Bank and Hellenic Postbank of Greece; Banco Popular Espanol, Bankinter, Caixa Galicia, BFA-Bankia, Banco Cívica, Caixa Ontinyent, Banco De Sabadell of Spain; Nova Ljubljanska Banka of Slovenia; Cyprus’s Marfin Popular Bank and Norddeutsche Landesbank of Germany.

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