New Study Quantifies European Banks' Capital Shortfalls as Stress Tests Loom
July 29 2016 - 03:17PM
Dow Jones News
By Adam Creighton
Europe's banking giants, including HSBC Holdings PLC, Deutsche
Bank AG and UniCredit SpA, would need to raise more than EUR253
billion ($280 billion) in capital to meet the robustness standards
specified by the U.S. Federal Reserve, rising to more than EUR572
billion in a crisis situation, according to new analysis released
Friday.
The figures, compiled by New York University's Viral Acharya and
others, dwarf the EUR25 billion shortfall the European Banking
Authority said the Continent's largest banks would need to raise in
2014. The study was released hours before the EBA is due to give
its stress-test results for 2016 at 10 p.m. CET (4 p.m. ET).
Prof. Acharya's study of 34 of the largest European banks, with
more than EUR23 trillion in assets, also found they would need to
raise more than EUR1.19 trillion, potentially from governments, to
have enough equity to withstand another financial crisis.
"The European banking sector requires a comprehensive
recapitalization across almost all countries including not only
peripheral countries such as Italy and Spain but also large core
European banks in Germany and France, in particular," the paper
said.
Europe's largest banks have shed more than 35% of their market
values since the EBA's 2014 stress tests, and as of June 30 their
average ratio of market value to book value was 70%, the paper
said. "This ratio was above one in November 2014 and highlights the
increasing concerns of market participants on bank asset quality
compared to the valuations of bank assets in their balance sheets,"
according to the study.
Prof. Acharya's analysis calculates banks' leverage ratios, or
equity as a share of total assets, based on their current
stock-market valuations.
"When a bank's market value of equity is approaching zero, it
doesn't matter what the book value of a bank's equity is compared
to what investors believe it actually is; Lehman's was positive
when it collapsed," Prof. Acharya said in an interview.
The market value of the French, Italian and German banks in the
study, as a share of their total balance-sheet assets, had fallen
to 2%, 2.9% and 1.1%, respectively -- far below the minimum 4%
leverage ratio the Fed specified in its latest round of stress
tests. Deutsche Bank's market-based leverage ratio was 1% and
troubled Italian lender Banca Monte dei Paschi di Siena SpA was
0.57%, he found.
Five French banks, including BNP Paribas and Société Générale,
would require EUR173 billion of new capital, equivalent to 7.9% of
France's GDP, to meet a 4% leverage ratio in a crisis situation --
more than any other banking system in both absolute and relative
terms, the study found.
Bank of England Gov. Mark Carney, in a letter to Group of 20
finance ministers earlier this month, said international regulatory
frameworks for banks were "largely settled," however. "Authorities
are committed to not significantly increasing overall capital
requirements across the banking sector," he said.
Prof. Acharya said European banking regulators' inability to
compel banks to raise capital -- by banning dividend payouts and
"bailing in" of subordinated debt, for example -- showed they had
been "captured" by financial interests. "It's a classic case of
shareholders and bankers not wanting to do what's in interests of
the bank, but rather their own interests," he said.
Write to Adam Creighton at adam.creighton@dowjones.com
(END) Dow Jones Newswires
July 29, 2016 15:02 ET (19:02 GMT)
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