DealBook: European Banks Hunt for Ways to Raise Cash

Francois Lenoir/Reuters

LONDON — As Europe continues to grapple with its sovereign debt crisis, many of the Continent’s banks are facing increased financing costs and limited access to much-needed cash, according to the Bank for International Settlements, an association of the world’s central banks.

In its quarterly review to be published on Monday, the Swiss-based institution said European banks, including Commerzbank of Germany, BNP Paribas of France and Lloyds Banking Group of Britain, are selling assets and increasing customers’ interest rates in an effort to bolster their balance sheets.

The steps come as the European Banking Authority has increased the amount that it expects banks will have to raise to meet new capital requirements.

Last week, European authorities said financial firms must find an additional $153 billion of capital. That is up from a previous estimate of $141 billion. Banks are required to have a core Tier 1 capital ratio, a measure of a firm’s ability to weather financial shocks, of 9 percent by June 2012.

“Banks and other financial institutions in the euro area are in a difficult situation,” said Stephen Cecchetti, head of the monetary and economic department of the Bank for International Settlements, on a conference call with reporters. “On the asset side of their balance sheets, they face losses because of sovereign debt holdings. On the liability side, they face even more difficulty in finding funding.”

The lack of new financing will soon start to bite. Nearly $2 trillion of bank debt is due to be repaid by the end of 2014, according to data from the Bank for International Settlements.

European banks are likely to have varying degrees of success in raising new funds. Because of Germany’s continued economic resilience, banks in that country were able to tap the markets for a combined $47 billion of additional debt financing in the third quarter of 2011, the settlement bank said.

Yet lenders in France, which may soon lose its coveted triple-A sovereign debt rating, had net repayments to investors — the difference between money raised and repaid — reach $18 billion over the same period.

With debt financing difficult to come by, financial firms are turning to other means to increase their capital bases. That includes raising interest rates on customers, despite the European Central Bank’s reduction of its benchmark rate to 1 percent last week.

The Bank for International Settlements estimates that euro zone banks have increased customer interest rates, on average, by 1 percentage point in the 52-week period ended Sept. 30. In Greece and Portugal, institutions have pushed rates up by 2 percentage points over the same period.

Firms are also turning to asset sales to increase their capital reserves. Attention has focused on banks’ international operations, particularly in Eastern Europe, as they focus attention to their home markets.

According to the advisory firm Deloitte, European banks currently have $2.2 trillion in noncore and nonperforming assets on their balance sheets, much of which could be put up for sale.

“Deleveraging is a key objective of most banks’ strategic plans, which is likely to lead to increased divestment in 2012 and beyond,” Robert Young, a partner at Deloitte, said in a statement.

A reduction in European banks’ operations outside their home countries will likely have a ripple effect.

The Continent’s banks, for example, currently provide almost 50 percent of the funding for nonfinancial firms in Eastern Europe, according to the Bank for International Settlements. If European banks reduce their lending, these Eastern Europe companies may face dwindling sources of financing, which could hurt the region’s overall economy.

Banks already are cutting back. Commerzbank and UniCredit of Italy have said they plan to reduce their operations in Eastern Europe.

And authorities in Austria, whose financial firms have been very active in the region, want new loans to Eastern European companies to be matched by similar increases in local deposits. Their goal is to ensure Austrian banks remain well capitalized to provide lending for domestic customers.

“When banks pull back from outside the E.U., the hole they’re leaving is being filled by others,” said Mr. Cecchetti of the Bank for International Settlements. “But that may change if they continue to shed foreign assets and conditions in the financial markets change.”

Article source: http://dealbook.nytimes.com/2011/12/11/european-banks-hunt-for-ways-to-increase-capital/?partner=rss&emc=rss