New European Bank Capital Requirements a "Major Challenge", Says PwC
Eurozone leaders have agreed that European banks will be required to raise €106bn (£92.2bn) of fresh capital by June 2012 and that the eurozone’s bailout fund will be increased to €1 trillion.
Andrew Gray, partner at PricewaterhouseCoopers (PwC), said: “€106bn is a lot of capital to raise and appetite for investing in banks is not particularly high at present as returns on equity are under pressure as a result of Basel III and other regulatory changes. Banks will find it challenging to raise additional capital by next June and market observers will take a keen interest in who is able to and how expensive it will be. Clearly not all banks will be able to wait until the last minute as the market will be unable to provide significant amounts at short notice.”
Commenting on the agreement to increase the eurozone’s bailout fund to €1 trillion, Gray continued: “There is significant pressure to resolve the level of government debt among eurozone countries and, inevitably some write-downs will be required. This commitment is a helpful step in the right direction, however there is significant work still to be done. The full effect on individual institutions is not yet clear and we will have to wait to see the market’s reaction before understanding the implications for other eurozone countries.”
Patrick Fell, partner at PwC, added: “The EU approach focuses on banks getting to 9% core Tier 1 capital levels by mid-2012, which will be a major challenge for some. There is the danger that some banks attempt to meet it by slicing lending instead of raising capital. In effect the European financial problems in 2011 have driven governments to bring forward the higher capital requirements that Basel III wanted. Basel mandated a tightening of requirements over an extended period of ten years, at least partly, to avoid a resulting contraction of credit with its adverse economic effects. The EU has front loaded it.
“To meet the mid-2012 challenge banks will need to manage their capital programmes carefully. They might find they adopt a quick fix now, but implement a more cost effective strategy when the market has got over the bulge in the next few months,” he concluded.