Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Europe's Banks Make Mockery of New Capital Rules

I had been wondering how on earth European banks were going to be able to raise enough capital to meet new regulatory requirements.

Last month European financial regulators ordered banks to raise core capital to 9 percent of risk-weighted assets. The idea was the larger capital cushions would help them survive the ongoing sovereign debt crisis.

But as the crisis deepens, it becomes harder and harder for the banks to raise capital. Who wants to be the last sucker into some Italian or Spanish bank? And you don't really want to be selling off your assets into this mess. So you're stuck.

Or so I thought.

It turns out banks have figured out how to meet the new capital requirements without actually having to raise any capital at all.

Bloomberg reports Italy's fourth-largest bank, Unione di Banche Italiane SCPA, is planning to raise no new capital from investors.

Instead it will just change the risk weightings it assigns to its assets.

And it's not just that bank:

Banco Santander SA, Spain's largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Spanish banks aren't alone in using the practice...Commerzbank AG , Germany's second-biggest lender, said it will do the same. Lloyds Banking Group Plc , Britain's biggest mortgage lender, and HSBC Holdings Plc , Europe's largest bank, both said they cut risk-weighted assets by changing the model.

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