European Banks Face Deadline to Raise Capital Levels

With European leaders under pressure to produce a major package of measures to tackle the debt crisis within weeks, banking supervisors are preparing a proposal that will place substantial new demands on European banks.

Europe’s leaders were given a boost Thursday when Slovakia’s Parliament reversed course and ratified a plan to bolster the euro zone’s rescue fund, becoming the 17th and final country to do so.

But, when European leaders meet in Brussels on Oct. 23, they will confront a series of complex decisions, including how much to increase the contribution of private investors to a Greek bailout. One leading banker confirmed Thursday that those discussions were already under way.

On Wednesday, the president of the European Commission, José Manuel Barroso, called for a comprehensive program of banking recapitalization and, the day before, the French foreign minister, Alain Juppé, said that French banks would be asked to build up capital buffers equivalent to 9 percent of their assets.

The European Banking Authority, which coordinates the work of supervisors in Europe, is reviewing the results of stress tests conducted in July.

Unlike that exercise, the new review takes into account the current market value of Greek and other sovereign debt, according to European officials who spoke on condition of anonymity because the tests are confidential.

In this case, the examination assumes relatively normal conditions rather than distressed ones as would obtain during a big drop in economic growth. But rapid recapitalization is likely to be required.

“A three- to six-month deadline is being considered,” one E.U. official said, adding that no decision had been made. One option is a two-stage process under which banks would be required to move up their recapitalization proposals, perhaps within three months, and then complete them three months later.

Struggling banks would be asked to raise capital themselves and then seek aid from their governments before European funds would be made available.

New, higher, capital buffers would be temporary to help restore confidence — and to insulate the sector against continued turbulence, the official said.

But calls for higher capital requirements have received a cool reception from the banking community, with some executives suggesting that financial institutions would rather sell assets than raise more capital.

The chief executive of Deutsche Bank, Josef Ackermann, said that he doubted requiring lenders to raise their capital levels would resolve the sovereign debt crisis.

“The injection of capital would not address the actual problem,” Mr. Ackermann said, according to a Bloomberg News report citing a speech given at a conference in Berlin. “It is not the capital funding of banks that is the problem, but rather the fact that government bonds have lost their status as risk-free assets.”

European officials anticipated that the banks would be opposed to the measure, the European official said. “They may use different arguments, but I assume the message will change once they know the detail.”

The European Banking Authority, which is likely to put forward proposals before the Oct. 23 meeting of European leaders, has declined to comment on speculation that it will recommend a 9 percent capital buffer.

“In our role as a European agency we are there to give technical advice to the European institutions,” said Romain Sadet, a spokesman for the agency.

Meanwhile, talks are under way on revising a July 21 agreement on a second bailout for Greece, which called for write-downs, or haircuts, of 21 percent for banks and other creditors, amid speculation that bank write-downs of 50 percent to 60 percent are being promoted by some governments.

“I led the negotiations at the summit in Brussels and will be there again next week because there are efforts to reopen it,” said Mr. Ackermann, who also is chairman of the global bank lobbying group, the Institute of International Finance. “That would mean an increase from the 21 percent we voluntarily said we’d do as investors, and it wasn’t easy at all to convince the investors to take that loss.”

European officials sought to limit the scope of negotiations. Because market conditions have changed since July 21, when the agreement was struck, the private sector may have to increase its contributions to stick to the “spirit” of the agreement, the official said.

Another crucial issue to be confronted by European leaders this month is whether to increase the firepower of the euro zone’s €440 billion, or $606 billion, bailout fund by leveraging it as advocated by the United States.

European officials say they believe a model under which the fund would insure against losses on purchases of bonds in struggling countries is the most likely option. The European Central Bank opposes another plan that would have it buy the bonds with the fund insuring it against losses.

On Thursday, one E.U. official said there was a preference for avoiding highly complex programs that used some of the financial engineering blamed for causing the crisis in 2008, in favor of a “plain vanilla” version.

For Slovakia, the successful passage of the rescue fund was just the beginning of a new political drama after Prime Minister Iveta Radicova lost a vote of confidence Tuesday, cutting her term as prime minister in half and setting the stage for new elections in March 2012.

The opposition Smer party already held the most seats in Parliament and was leading in opinion polls. The party’s leader, Robert Fico, a leftist former prime minister, hopes that voters will be ready to return him to power.

Nicholas Kulish contributed reporting from Berlin.

Article source: http://www.nytimes.com/2011/10/14/business/global/european-banks-face-deadline-to-raise-capital-levels.html?partner=rss&emc=rss