[ 2013-08-12 ]

Eurozone banks need to shed €3.2tn in assets to meet Basel III
Europe’s biggest banks will have to cut €661bn
of assets and generate €47bn of fresh capital
over the next five years to comply with
forthcoming regulations aimed at reducing the
likelihood of another taxpayer funded bailout.

The figures form part of an analysis by the UK’s
Royal Bank of Scotland – which singles out
Deutsche Bank, Crédit Agricole and Barclays as
the banks most in need of fresh capital –
highlighting that five years on since the
financial crisis, Europe’s banks are still
“too big to fail”.

Overall, the region’s banks need to shed
€3.2tn in assets by 2018 to comply with Basel
III regulations on capital and leverage, according
to RBS.

The burden is greatest on smaller banks, which
need to shed €2.6tn from their balance sheets,
raising fears that lending to the region’s small
and medium size enterprises will be sharply
reduced as a result.

“There is too much debt still across Europe’s
economies and the manifestation of that is on bank
balance sheets,” said James Chappell, an analyst
at Berenberg bank. “The major issue is that the
banks still don’t have enough capital to write
down those loans.”

Eurozone banks have already shrunk their balance
sheets by €2.9tn since May 2012 – by renewing
fewer loans, repurchase and derivatives contracts
and selling non-core businesses – according to
data from the Frankfurt-based European Central
Bank.

Deutsche Bank recently said it would seek to cut
its assets by about a fifth over the next two and
a half years. Barclays, which announced a £5.8bn
rights issue last month, said it wants to shrink
its balance sheet by £65bn-£80bn.

Europe’s banking sector assets are worth
€32tn, or more than three times the single
currency zone’s annual gross domestic product.

However, Bridget Gandy, managing director at
Fitch, said regulators’ focus on banks’ size
and their leverage in themselves is misplaced.

“If you compel banks only to use a leverage
ratio, the only way to be more profitable is to
take more risks on the assets they have,” she
said. “You need to have balance between capital
coverage of risk-weighted assets and leverage –
risk is not just about size.”

Banks’ deleveraging has already led to
record-low bond issuance by European financial
institutions. The fall also reflects the increased
risks of creditors being “bailed-in” if a bank
fails, following Europe’s overhaul of the way
they are rescued in the event of a default in a
bid to protect taxpayers.

While banks have also made early repayments to the
ECB of cheap funding taken out under its
crisis-fighting long-term refinancing operations,
small and medium-sized businesses, particularly in
countries such as Spain, complain they cannot
access bank finance.

Combined with the continuing recession, critics
suggest the banks are more focused on deleveraging
than increasing the amount they lend out, which
could hamper any economic recovery.

Source - FT

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