BREAKINGVIEWS-EU bank firefighters have fewer options than 2008 Reuters - 22/09/2011 16:59:18 (The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Sept 22 (Reuters Breakingviews) -
European banks are back in a familiar place. Investors are panicking about sovereign rather than ropey structured credit exposures, but may soon face the same stark choice as in 2008 -- market-based recapitalisations, or full or partial nationalisation. Yet states have fewer ways to rescue their charges than three years ago.
When euro zone banks needed help after the fall of Lehman Brothers, cash injections tended to be via debt-like preference shares that paid a coupon. Apart from the income, politicians liked these as it meant they avoided taking stakes. But new Basel III capital reforms mean banks' core capital can only consist of genuine equity.
Asset insurance, like that taken out by Royal Bank of Scotland (
RBS.L) in 2009, looks more promising. By reducing risk-weighted assets, state commitments to take losses on toxic sovereign debt would increase capital for a smaller overall outlay. But the shakier peripheral states that most need insurance would need their schemes to be underwritten by an expanded European Financial Stability Facility. Getting that past 17 increasingly fractious parliaments would be tricky. And apart from the circular nature of governments insuring their own debt, a pan-European insurance scheme would be byzantine in its complexity.
The least-bad option is direct recapitalisations, like those undertaken by the UK in October 2008. British banks were rescued via open offers that allowed shareholders to claw back, but European banks could equally opt for rights issue underwritten by taxpayers. This worked out well for Bank of Ireland in July. Instead of nationalisation, the arrival of new North American investors meant existing shareholders largely supported the issue, cutting the state's stake. With luck, government commitments would ease volatility, allowing the bigger French and German banks to largely escape the state.
Such a rescue would hinge on two things. First, countries that could not increase their public debt burdens would need to borrow from the EFSF. Second, the European Commission would need to deliver on hints that it will relax state-aid rules that require bailed-out banks to shed assets, as this could exacerbate the economic downturn.
But underwritten rights issues can't solve the crisis on their own. As well as direct capital injections in 2008, the UK also guaranteed new issues of bank debt and expanded its liquidity facilities. The European Central Bank may need to expand the duration of its emergency dollar and euro facilities still further, and the EFSF may need to guarantee term debt to re-open senior unsecured debt markets. Without this kind of comprehensive package, bank recapitalisations could be an expensive waste of time.
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CONTEXT NEWS
-- Stricter rules surrounding the treatment of European banks that receive state aid will be delayed beyond the end of this year, the EU's competition commission said on Sept 15.
-- Joaquin Almunia told delegates at the Eurofi conference in Wroclaw, Poland, that tightening the rules would not be safe in the current environment.
-- For previous columns by the author, Reuters customers can click on
(Editing by Chris Hughes and David Evans)
