March 28, 2024

DealBook: Once Bailed Out, Commerzbank Again Raises Doubts

8:41 p.m. | Updated

FRANKFURT — The cloud of dread hanging over European banks darkened after reports that Commerzbank could be on the verge of another government bailout.

Like many of the region’s financial firms, Commerzbank — the second-largest German lender behind Deutsche Bank — is under pressure from regulators to increase its capital buffer. This month, the European Banking Authority said the firm had to raise an additional 5.3 billion euros, or $6.9 billion, by the middle of 2012.

But analysts and others are worried that Commerzbank will not be able to come up with the funds, which amount to roughly 80 percent of the firm’s market value. In the current turmoil, investors are loath to risk more money on the sector.

With a substantial sum to raise, speculation has swirled that Commerzbank was in advance talks with the German Finance Ministry about a rescue plan.

“The banking system is extremely fragile,” Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels. “Whether it will result in spectacular events like collapses or nationalizations is difficult to say. I would not rule anything out.”

Commerzbank has denied the reports, saying it is determined to avoid taking more government aid. The firm, based in Frankfurt, is already 25 percent owned by the German government as a result of a rescue in 2009.

Although the German Finance Ministry issued a statement that played down prospects for a bailout of Commerzbank, the government stopped short of a denial.

“As a shareholder of Commerzbank, the government is in regular contact,” the ministry said. “However, this does not go beyond an exchange of information.”

The situation illustrates the quandary facing European financial firms and policymakers.

As the sovereign debt crisis drags on, regulators are pressing banks to increase their capital cushion, part of a broader effort to restore faith in the financial markets. But industry executives complain that the only way to increase their reserves is to sell assets at rock-bottom prices and curtail lending, amplifying an economic slowdown already under way in the euro zone.

“If the capitalization level of large banks is too low you have to repair that — whether you like it or not — to restore market confidence,” said Harald A. Benink, a professor of banking and finance at Tilburg University in the Netherlands. But he added, “It is difficult for banks to go to markets in this environment. The governments will have to step in.”

Banks have to raise a hefty amount.

Last week, the European Banking Authority said that institutions should raise 115 billion euros in new capital by the end of June. Banco Santander in Madrid needs 15.3 billion euros; UniCredit has to come up with 8 billion euros.

While Germany has one of the strongest economies in Europe, its banking system remains especially vulnerable. Of the 13 big German banks examined by the banking authority last week, six needed additional capital. Deutsche Bank must raise 3.2 billion euros.

The industry’s options are limited.

A number of European banks have announced plans to sell assets to maintain a sizable capital cushion. According to the advisory firm Deloitte, the region’s firms currently hold $2.2 trillion in noncore and nonperforming assets, much of which could be offloaded. Even before the banking authority published the new requirements, Commerzbank had said it would temporarily halt some international lending and sell core assets.

But suitors are largely sitting on the sidelines, fearful that asset prices will continue to fall. Moody’s Investors Service this week warned that the banks could have a hard time finding buyers.

Investors are also largely unwilling to plow more money into the European banks. Many have watched the value of their holdings erode since the start of the sovereign debt crisis.

In recent weeks, some financial firms have been shuffling their bonds in a bid to bolster reserves. Commerzbank has offered to buy $800 million of hybrid securities at a discount — a complex move that will allow it to increase its capital levels without raising additional funds.

But such maneuvers have done little to ease investors’ fears.

On a day when the main European stock indexes were mixed, Commerzbank shares fell almost 4 percent Tuesday. The stock has plunged around 75 percent since March.

Jack Ewing reported from Frankfurt and Liz Alderman from Paris. Raphael Minder contributed reporting from Madrid.

Article source: http://feeds.nytimes.com/click.phdo?i=dd87f0bd67747773f280bcec93d09130

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