Europe’s Banks Face Tougher Demands

The head of Europe’s top banking regulator has raised the bar for lenders’ capital requirements, insisting that the 9 percent capital ratio they had to hit as a “temporary buffer” by June is to become permanent.


Andrea Enria, chairman of the European Banking Authority, said “capital conservation” was his priority, with the euro zone crisis persisting and the six-year phase-in of Basel III global capital standards set to begin next year.

He was speaking after last week’s EBA announcement that 27 European banks had boosted capital by a combined 94 billion euros ($115 billion) to reach what it described last autumn as a “temporary” requirement for European banks to hold core tier one capital equivalent to at least 9 percent of risk-weighted assets.

“The key thing will be capital conservation,” Mr. Enria told the Financial Times. “We don’t want the capital to be released. We want the banks maintaining this capital level and gradually moving to the Basel III full implementation. We will be asking the banks to develop capital plans to get there.”

Basel III capital ratios rely on a tougher definition than current rules dictate, limiting the instruments that count as “core tier one capital”.

But the headline numbers are lower than the EBA’s. Basel III rulessay banks must have a 7 percent core tier one ratio by 2019, with a top-up of up to 2.5 percentage points for the biggest global banks.

Mr. Enria’s comments are likely to revive tensions with Europe’s banks and some national policy makers, who had resisted the EBA’s drive to boost capital levels at a time of stress.

Mr. Enria calculates that more than 240 billion euros will have been injected into European banks through various measures over 2011 and 2012 through market capital raisings, the EBA exercise and the Greek and Spanish bailouts. The figure compares with $245 billion of support for US banks under the 2008 Troubled Asset Relief Program.

“The problem is we’ve done it in a piecemeal fashion,” Mr. Enria said. “The decision-making process is complex [in the EU]. If we had a more simplified process, we could have had a European Tarp in one shot and the market impact would have been quite different.”

In a concession, banks whose losses ate into capital buffers would not be required to raise fresh capital immediately. “But we will ask them to have a plan to replenish the capital,” Mr. Enria said.

The Italian central banker admitted the EBA was likely to become a very different entity as a result of the EU’s “banking union”, designed to buttress banks with pooled deposit guarantees and closer regulatory supervision on a regional level. “The important thing is that we get [the regulations] right,” he said. “If [that] means totally reshaping the EBA, that’s fine.”