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 didnâ€™t specify the level. The European Banking Authority, the banking regulator, wants to force the regionâ€™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 eurozoneâ€™s â‚¬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 regionâ€™s businesses of credit, dealing a blow to the struggling economy.
On average, European banksâ€™ share prices are trading at about 60% of book value. “Why should we raise capital at these [depressed share price] levels?” theÂ 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 Greeceâ€™s private sector lenders — such as banks, insurance companies and pension funds — should be forced to shoulder as part of Greeceâ€™s second bailout package. According to French newspaperÂ 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%.
Greeceâ€™s private sector creditors were initially forced to take a 21% write-down on their loans as part of the second â‚¬150 billion Greek bailout package that was agreed in July. But it has since become apparent that Greeceâ€™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.