European banks raised capital buffers by $265B

LONDON -- Europe's banks have raised an extra (EURO)205 billion ($265 billion) in fresh capital since December in a bid to meet new rules aimed at strengthening the ailing sector, an EU regulator said Wednesday.

The European Banking Authority estimated in December that of 71 banks it monitors, 37 needed an extra (EURO)115 billion in reserve capital to ensure they could survive a serious economic and financial crash. In a report Wednesday, the EBA said the banks increased the reserves mainly by issuing new capital, withholding dividends and reducing holdings of risky assets.

"Banks are now in a better shape to finance the real economy," said Andrea Enria, chairman of the EBA.

Europe's banking sector is a key link in the continent's financial crisis because the lenders' large holdings of government bonds have made them vulnerable to investor concerns about excessive public debt. This has been made worse by real estate loans and assets that were turned toxic by a collapse the region's property markets.

Banks normally lend to each other on a daily basis to cover a large part of their short-term financing needs, but fears that some banks could fail have dried up that credit market. The result has been a drop in lending activity to the real economy.

Of the (EURO)205 billion in new capital, (EURO)115.7 billion came from 27 banks that the EBA had identified last year as insufficiently capitalized. Another (EURO)47 billion was raised by banks that already met capital requirements but wanted to increase their reserves further. About (EURO)18 billion is being put into Greek banks and (EURO)24 billion in Spain's nationalized lender Bankia.

Market-watchers had feared that to raise the money requested by the EBA, banks would have been forced to rein in on lending to businesses and households, hurting economic growth. However, in its report, the EBA said the banks' efforts to raise the cash had not changed lending activity.

The EBA, which admits that credit conditions remained unsatisfactory, hopes that the greater transparency created by its stress tests and its requirements for greater capital cushions will ease fears over the banks and help improve market conditions.

The authority, which performs annual stress tests on Europe's banks, will monitor the banks to make sure these capital reserves are preserved over the coming year, when lenders will have to prepare for new, global rules on capital requirements, called Basel III.

The EBA's role as banking regulator is due to be taken over by the European Central Bank. European leaders are finalizing plans to create a banking union that would give the ECB not only the supervisory powers of the EBA but also the ability to intervene, help and restructure banks directly. That would bypass national regulators, who have in recent years been reluctant to admit the extent of the financial problems afflicting their countries' banking sectors.