European banks may have to raise billions to meet extra surcharge call

Wednesday, 29 June 2011 00:01 - - {{hitsCtrl.values.hits}}

LONDON: Europe’s banks may need to raise tens of billions of euros after regulators slapped an extra capital surcharge on big lenders to make them safer, and told them they could not use contingent capital for the extra cushion.

Banks in France and Germany may be most in need, adding to fears their capital could be strained by losses on holdings of Greek bonds and loans to the troubled euro zone country.

A surcharge of between 1% and 2.5% for the biggest banks agreed by global regulators at the weekend was in line with or slightly less than expectations.

But the exclusion of contingent capital (CoCos) to reach the higher target will be a disappointment to many banks and investors, analysts said.

“The quid quo pro of a lower charge (than expected) appears to be the fact that CoCos cannot be used towards the surcharge - it must be made entirely of equity capital,” said Andrew Lim, analyst at Espirito Santo .

Not allowing CoCos will be an unwelcome surprise for those managers and investors who had seen them as the solution to recapitalising the sector, said Antonio Guglielmi , analyst at Mediobanca .

“The buffer should trigger a final wave of rights issues,” Guglielmi said in a note on Monday, estimating a 62 billion ($88.8 billion) capital shortfall shared between BNP Paribas , Societe Generale , Credit Agricole , Santander, Credit Suisse, Deutsche Bank and UniCredit .

To meet the new standards Deutsche Bank needs more than 12 billion, HSBC needs $14 billion and Credit Agricole, Credit Suisse and SocGen each have a capital deficit of about 7 billion, Lim estimated. The big French and German banks are already under pressure due to their bigger exposure to Greece than banks elsewhere. Losses there could force some capital raisings, analysts said.

The new rules, which need to be agreed by G20 leaders in November, should finalise capital requirements after years of wrangling. As a result, it could be a positive step for the industry and give investors greater confidence, several analysts said. Some banks that had been considering issuing CoCos, such as Britain’s Barclays , could scale back plans given the new guidance, analysts said.