European banks are in need of cash, and will have to find some 114.7 billion to top up their capital reserves, according to a stress test carried out by the European Banking Authority. The EBA released the results of its analysis of capital requirements of European financial institutes on Thursday evening.
"The EU-wide recapitalisation exercise is an important element in strengthening European banks' position in the current environment characterised by heightened systemic risk arising from the sovereign debt crisis," the EBA said in a statement.
The EBA will demand that German banks come up with 13.1 billion to satisfy the new core capital ratio of 9 percent recently agreed to by European leaders. Banks have until mid-2012 to fulfil the requirements. The total needed is higher than the 106 billion estimated in October primarily because of the increased needs of banks in Germany, Austria, Belgium and Italy.
The new requirement for Germany is well over double the 5.2 billion estimated in October. According to an unnamed financial source cited by news agency Reuters, the country's leading bank, Deutsche Bank, will have to raise 3.2 billion while struggling financial giant Commerzbank needs to come up with 5.3 billion. Other banks in Germany that will have to find additional capital include state-owned banks LBBW, Nord LB, West LB and Helaba.
Big Hole in Spain
EU leaders increased capital requirements on the Continent in an effort to slow the growing mistrust of European financial institutions. With the euro-zone debt crisis still spreading, banks with large holdings of European sovereign bonds, particularly from debt-stricken countries, have been viewed with suspicion by other financial institutions. Interbank lending has slowed as a result.
Not surprisingly, the greatest lack of capital was found in Greece, where banks need some 30 billion. Following closely behind was Spain, where banks must come up with 26.2 billion. Italian banks need a total of 15.4 billion and French banks will have to find 7.3 billion. Banks have until the end of June to conform to the new capital requirements. Some will likely need state help.
Critics have said that the rapid increase of capital requirements may actually have made the problem worse. Originally, international agreements gave banks until 2017 to achieve a core capital ratio of 9 percent, allowing them plenty of room to get there on their own. Now, however, they only have six months, meaning several banks will likely run into difficulties.
The EBA data comes just as European leaders are gathered in Brussels for a two-day summit focusing on possible solutions to the euro-zone debt crisis. Leaders hope to reach a far-reaching agreement aimed at deepening fiscal integration in the common currency area.