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Maley: brace for an EU banking showdown

European politicians look set for a showdown with some of the region’s major banks as a result of plans to force banks to boost their capital buffers.

Overnight, José Manuel Barroso, the head of the European Commission, took a hard line with the region’s banks, calling for a compulsory recapitalisation of important banks and for restrictions on dividends to shareholders and banker bonus payments in the interim.

Speaking in Brussels overnight, Barroso said that there was an “urgent” need for the eurozone to come up with a co-ordinated plan for recapitalising its “systemic” banks. This would also include global players such as BNP Paribas and Deutsche Bank.

These banks, he said, should temporarily be forced to hold “much higher” levels of capital, although he didn’t specify the level. The European Banking Authority, the banking regulator, wants to force the region’s banks to boost their core tier-one capital ratio to 9% of risk-weighted assets.

Barroso argued that banks needed to take account of their sovereign debt exposures in working out their capital needs. They should then quickly come up with detailed recapitalisation plans. In the interim, he said, “national supervisors should prevent them from paying dividends and bonuses”.

Banks, he said, should initially try and raise extra capital from the private sector, before asking for support from their national governments. If this was not available, he said, they could boost their capital by borrowing from the eurozone’s €440 billion ($US606.5 billion) bailout fund.

But the banks are fighting back. According to a report in the Financial Times, leading banks in the region say that they would prefer to meet the higher capital ratios by selling assets, rather than raising expensive new capital. A move by European banks to cut back on their lending could starve the region’s businesses of credit, dealing a blow to the struggling economy.

The FT quoted banking sources as saying that the backlash is being led by French banks BNP Paribas and Société Générale, but would be copied by lenders across Italy, Spain and Germany.

On average, European banks’ share prices are trading at about 60% of book value. “Why should we raise capital at these [depressed share price] levels?” the FT quoted one eurozone bank boss as saying. Another added that it was “fundamentally wrong to increase capital at the moment. Deleveraging needs to happen”.

Meanwhile, France and Germany again are at loggerheads over the size of the “haircuts” or write-downs that Greece’s private sector lenders — such as banks, insurance companies and pension funds — should be forced to shoulder as part of Greece’s second bailout package. According to French newspaper Le Monde, Berlin wants to force private creditors to take a 50% write-down on their loans. Paris, however, does not want to go above 35%.

Greece’s private sector creditors were initially forced to take a 21% write-down on their loans as part of the second €150 billion Greek bailout package that was agreed in July. But it has since become apparent that Greece’s swollen budget deficit means that the bailout will have to be larger than what was contemplated at that time.

Germany is arguing that private sector creditors should be forced to take heftier losses on their loans but France is troubled that hefty write-downs could spell trouble for the French banking sector, which is heavily exposed to Greek debt.

*This article first appeared on Business Spectator

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    AR
    Posted Thursday, 13 October 2011 at 9:53 pm | Permalink

    trouble for the French banking sector, which is heavily exposed to Greek debt.” As often reported, French banks hold 56B of Greece’s debt - 14B by the government but 42B by private banks, primarily SG & BNP.
    The dour Germans hold 34B, but the banks only 12B, the government holds the remaining 22B.
    Small wonder that France is reluctant to move as it will inevitably mean nationalising their, already, semi state banking system.
    I doubt that anyone interested needs reminding that France’s deficit was NEVER within the risible 3% decreed under the Strasbourg agreement which set the euro underway. It is a house of cards, containing far more fou than court cards.

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