BRUSSELS (MNI) – European banks will need to raise a total of
E114.7 billion to meet a 9% core tier one capital requirement designed
to help them weather the crisis in Eurozone sovereign debt markets, the
European Banking Authority said on Thursday.

That was a slight increase from the EBA’s estimate of E106 billion
in late October.

The EBA also confirmed that the deadline for European banks to
submit their recapitalisation plans for banking supervisors’ approval
has been extended, and it said one third of the money required will go
towards shielding banks from their exposure to troubled government
bonds, as reported by MNI last week.

Banks will now have until January 20 2012 to submit their plans,
rather than the previous end-December deadline, but they must still
raise the capital by June 2012, as originally stipulated. The rest of
the money is for reaching EU and Basel III capital requirement rules.

Spanish banks will need to raise as much as E26.2 billion, Italian
banks E15.4 billion and German banks E13.1 billion, the EBA said,
largely confirming estimates released on October 26.

The EBA declined to publish details of Greek banks’
recapitalisation needs, since the EU-IMF bailout programme for the
country already sets those targets.

In its report, the EBA emphasized the temporary nature of
extraordinary capital requirements: “The sovereign capital buffer is a
one-off measure and, once the deployment of the new EFSF’s capacity
becomes effective in addressing the sovereign debt crisis by lifting
sovereign bond valuations from today’s distressed prices, the EBA will
reassess the ongoing need for and size of capital buffers against banks’
sovereign exposures,” the EBA said.

Anxious to ensure that banks don’t cut lending to the real economy
in a bid to reach the heightened capital requirements, the EU’s highest
banking supervisor set out a list of strategies that banks can and
cannot use.

“Banks should first use private sources of funding to strengthen
their capital position to meet the required target, including retained
earnings, reduced bonus payments, new issuances of common equity and
suitably strong contingent capital, and other liability management
measures,” the EBA said.

“National authorities will act in accordance with the EBA’s
coordination to seek to ensure that such plans do not lead to a reduced
flow of lending to the EU’s real economy by agreeing to reductions in
risk weighted assets as a means of attaining the target only insofar as
these are effected through the sale of selected assets,” said the EBA.

“Reductions in risk weighted assets due to the validation and
roll-out of appropriate internal models will not, in general, be allowed
as a means of addressing a capital shortfall unless these changes are
already planned and under consideration by the competent authority,” it
added.

The EBA also said that banks would not be able to reduce their need
to raise capital simply by selling government bonds. “Sales of sovereign
bonds will not alleviate the buffer requirement to be achieved by June
2012.”

Banks have, however, been given the green light to buy back hybrid
capital securities and replace them with “stronger capital instruments,”
but strict conditions were set for the use of convertible bonds.

“New issuances of very strong private convertible capital can be
accepted if in line with the criteria defined by the EBA,” but “existing
convertible capital instruments will not be eligible unless they are
converted into Core Tier 1 capital by the end of October 2012.”

–Brussels Newsroom, +324-952-28374; pkoh@marketnews.com

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