European Banks Could Take a 12% Capital Hit

September 2nd, 2011
in econ_news

lagarde-small Econintersect: Last Saturday (Aug.27, 2011) IMF (International Monetary Fund) head Christine Lagarde (pictured), speaking in Jackson Hole, Wyoming, said that European banks need “urgent recapitalization” in the face of coming sovereign debt defaults. Monday the European Commission denied there was any such need, that steps already taken were sufficient, as proven by the “stress test” that has been completed.

Follow up:

From Reuters:

The European Commission said there was no need to recapitalize the banks over and above what had been agreed after a recent annual "stress test" check of their ability to withstand economic and financial market headwinds.

"I don't think so. This discussion has already taken place between the EU and the IMF, and the IMF is well aware of the results and the follow-up decided after the stress-tests," Commission spokesman Amadeu Altafaj said.

Lagarde, speaking at an annual meeting of central bankers in Jackson Hole, Wyoming, on Saturday urged politicians to "act now" or risk seeing the fragile recovery derailed.

"Banks need urgent recapitalization," Lagarde said. "The most efficient solution would be mandatory substantial recapitalization -- seeking private resources first, but using public funds if necessary.

Reuters said that Lagarde did not elaborate.

That changed on Sept. 1 as Global Finance reported on a leaked draft of an IMF Global Financial Stability Report due to be released in three weeks. According to that report (from Dow Jones Newswires), the IMF projects that European banks would lose 10-12% of tangible common equity if sovereign bonds were marked to market. That would amount to approximately $287 billion.

In March S&P (Standard & Poors) determined that as much as $350 billion would be needed if there were ‘a “sharp” increase in yields and a “severe” economic downturn.’ (Bloomberg)

European Commission stress test results reported by Bloomberg in July stated that five banks needed to add $3.5 billion in equity and another 16 banks might need to raise an unspecified amount of capital if “their core Tier 1 ratio dropped below 6 percent, little more than the assessment’s 5 percent pass-mark,”

It looks as if opinions of risk exposure are hundreds of billions of dollars apart.

Sources: Reuters, Bloomberg and Global Finance









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