In the latest extend-and-pretend move by European officials, the EU may offer banks time to hit new capital target

European banks could get up to six months to strengthen their capital under plans aimed at halting the region’s debt crisis, giving them time to raise funds privately in the hope of averting another damaging credit crunch.

EU officials said on Thursday that weak banks may get the extra time to bolster their balance sheets after a rapid health check currently underway.

The European Banking Authority, which is assessing banks’ capital needs, is likely to mark down the value of banks’ holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters.

Deutsche Bank, Germany’s flagship lender, would need 9 billion euros in fresh equity to reach that level, two people with direct knowledge of the bank’s finances said on Thursday.

Deutsche Bank declined to comment, but in separate remarks the bank’s chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalization and added it had enough funds of its own to cope with a crisis.

Setting the bar at 9 percent would leave European banks with a capital shortfall of about 260 billion euros, based on a two-year recession and applying current market prices to holdings of Greek, Irish, Italian, Portuguese and Spanish government bonds, according to Reuters Breakingviews data.

Greece’s banks could have to raise over 30 billion euros under the plan, as they face big losses on their holdings of domestic bonds.

Banks are facing losses of 39 percent on their Greek bonds under a private sector rescue plan agreed in July, above the original estimate of a 21 percent hit, due to a rise in Greece’s risk profile.

Greek banks could endure a loss of up to 30 percent on the bonds but could not stand significantly bigger haircuts, which would also hurt the economy, Greek banking sources said.

European leaders are still discussing the recapitalization plans, with many details still subject to change, and face intense lobbying from banks and some countries who say it is too harsh. Proposals are expected to be presented to a meeting of European leaders on October 23.

The new standard is likely to be a 9 percent core tier 1 ratio, a key measure of a bank’s financial health, based on a tighter definition of capital than used now, although not as strict as that under new Basel III rules when in full force

Analysts at Credit Suisse said a 9 percent capital level would leave banks in need of 220 billion euros, with RBS, Deutsche Bank and BNP Paribas most in need.

Note that 39% haircut figure on Greek bonds. Although up from 21% in July, it is far too low. Anything under 50% is preposterous and 80% or higher losses would not be surprising in the least.

Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros

The Wall Street Journal reports widely varying analyst ranges in its article European Banks Face New Scrutiny Over Capital Needs

Analyst Estimates

  • Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.
  • Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.
  • Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.
  • Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region’s major banks, depending on various scenarios.

These ranges provide more questions than answers. Moreover, low-end lowball estimates such as €7.6 billion by Merrill Lynch are preposterous under all but the most ludicrous scenarios in the third round of “stress-free” tests now underway.

Deutsche Bank AG Chief Executive Josef Ackermann says it isn’t clear recapitalization efforts will help solve the crisis.

Hey, let’s just not recognize any bank losses ever.


Zero Hedge has some interesting charts of capital shortfalls as estimated by Credit Suisse.
Commentary and charts below from Credit Suisse. No link provided. Click on charts for sharper image.

One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn.

The table below details the breakdown of our estimated capital shortfall.

Figure 6: European banks – Capital deficit in CS ‘accelerated sovereign shock

Mike “Mish” Shedlock
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