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By STEPHEN FIDLER, ALESSANDRA GALLONI and ADAM COHEN
Long-awaited financial-system stress tests showed Thursday that the European Union's top 22 banks could survive a potential €400 billion, or $585 billion, in credit losses this year and next if the region's economy deteriorates more than expected.
In an upbeat interpretation of the exercise, finance ministers from the 27-nation bloc said the tests showed the large banks had sufficient capital to handle "a severe macroeconomic deterioration."
The seemingly soothing report feeds into tension between EU and U.S. policy makers over whether or not European banks are sufficiently capitalized to support an economic recovery. The U.S. thinks European banks need more capital, but the stress-test results seem to indicate otherwise.
However, banking supervisors who carried out the tests didn't provide country-by-country breakdowns or other details, raising questions about the rigor of the exercise and its usefulness. The 22 banks weren't named.
Several European bank analysts said they hadn't followed the exercise, and European stock indexes showed little investor reaction to the tests. One official observer said the tests were "designed to reassure."
By contrast, U.S. bank stress tests completed in May, while viewed by some analysts and investors as choreographed, concluded that 10 U.S. banks needed to raise an additional $74.6 billion in capital and pinpointed how much capital each bank needed. U.S. stock indexes, and the banking sector, rose sharply throughout the spring and summer.
The losses for the 22 European banks, which represent 60% of EU banking assets, were calculated assuming an economic contraction of 5.2% this year and 2.7% next year. That compares with the current forecasts calling for negative growth of 4% this year and positive growth of 0.4% in 2010.
In their statement, the ministers said: "This resilience of the banking system reflects the recent increase in earnings forecasts and, to a large extent, the important support currently provided by the public sector to the banking institutions."
They said based on current economic forecasts, an important measure of capital adequacy -- the so-called Tier 1 capital ratio -- would be well above 9% for the 22 banks, compared with a minimum requirement of 4%. Under the stress tests' more pessimistic economic scenario, no bank would see its Tier 1 capital ratio fall below 6%.
The results aren't directly comparable with a more extensive study of the European banking system by the International Monetary Fund, which was published earlier this week. Nor are the results comparable with the U.S.'s stress tests earlier this year.
The IMF said banks in the 16-nation euro zone wouldn't need to raise capital to ensure that banks had at least a 6% Tier 1 ratio, but banks would need to raise $150 billion to increase the ratio to 8% and $380 billion to boost it to 10%.
The adequacy of European bank capital cushions has been a source of friction between European governments and the U.S., which had spilled into meetings of the Group of 20 leading and developing economies, whose leaders met in Pittsburgh last week.
The U.S. is worried that poorly capitalized banks could undermine economic recovery -- as they did in Japan in the 1990s. Ahead of the G-20 meeting, the U.S. proposed that all banks increase capital to comply with a leverage ratio, or total assets as a multiple of equity capital, that would imply the need for major capital-raisings for some big European banks.
European governments, led by France and Germany, succeeded in diluting the U.S. initiative. The capital-adequacy measures used in Europe incorporate capital other than equity and calculate it as a proportion of risk-weighted assets, which are adjusted for their perceived riskiness by regulators. For example, bonds issued by a bank's national government are rated zero.
The IMF calculated that insisting on a leverage multiple of 25, a potential future target for big global banks, would force U.S. banks to raise $130 billion in new capital. But banks in the euro zone would need to raise much more: $310 billion. Those in the U.K. would also need a $120 billion capital boost. These extra requirements would also fall most heavily on big banks engaged in capital markets and derivative activity, bank analysts said.
Even without new rules firmly in place, some banks are taking advantage of buoyant stock markets to boost capital, if modestly. Three European banks announced this week they intended to tap the financial markets for money to boost their capital.
BNP Paribas SA, France's largest bank by market value, announced Tuesday that it would launch a €4.3 billion rights issue that it would use, along with other funds, to pay back the French state for the €5.1 billion in nonvoting shares it bought in BNP.
Two Italian banks, UniCredit SpA and Intesa Sanpaolo SpA, also unveiled capital-raising plans, effectively turning their backs on government-sponsored bonds that had been made available to Italian banks amid the financial crisis and said they would tap the financial markets.
The Italian state-aid packages came with several strings attached -- including restrictions on dividends and bonuses -- so most Italian banks have decided not to take up the government's offer.
UniCredit announced a €4 billion capital increase, while Intesa Sanpaolo said it would issue a Tier 1 hybrid bond worth up to €1.5 billion to strengthen its finances.
Because BNP is buying out a government stake, its Tier 1 ratio rises only slightly from 9.1% from 9.3%. UniCredit's Tier 1 ratio rises to 8.46% from 7.66%, while Intesa's increases to 8.1% from 7.7%, according to bank analysts.
Write to Stephen Fidler at [email protected], Alessandra Galloni at [email protected] and Adam Cohen at [email protected]
Printed in The Wall Street Journal, page C2
- OCTOBER 2, 2009
By STEPHEN FIDLER, ALESSANDRA GALLONI and ADAM COHEN
Long-awaited financial-system stress tests showed Thursday that the European Union's top 22 banks could survive a potential €400 billion, or $585 billion, in credit losses this year and next if the region's economy deteriorates more than expected.
In an upbeat interpretation of the exercise, finance ministers from the 27-nation bloc said the tests showed the large banks had sufficient capital to handle "a severe macroeconomic deterioration."
The seemingly soothing report feeds into tension between EU and U.S. policy makers over whether or not European banks are sufficiently capitalized to support an economic recovery. The U.S. thinks European banks need more capital, but the stress-test results seem to indicate otherwise.
However, banking supervisors who carried out the tests didn't provide country-by-country breakdowns or other details, raising questions about the rigor of the exercise and its usefulness. The 22 banks weren't named.
Several European bank analysts said they hadn't followed the exercise, and European stock indexes showed little investor reaction to the tests. One official observer said the tests were "designed to reassure."
By contrast, U.S. bank stress tests completed in May, while viewed by some analysts and investors as choreographed, concluded that 10 U.S. banks needed to raise an additional $74.6 billion in capital and pinpointed how much capital each bank needed. U.S. stock indexes, and the banking sector, rose sharply throughout the spring and summer.
The losses for the 22 European banks, which represent 60% of EU banking assets, were calculated assuming an economic contraction of 5.2% this year and 2.7% next year. That compares with the current forecasts calling for negative growth of 4% this year and positive growth of 0.4% in 2010.
In their statement, the ministers said: "This resilience of the banking system reflects the recent increase in earnings forecasts and, to a large extent, the important support currently provided by the public sector to the banking institutions."
They said based on current economic forecasts, an important measure of capital adequacy -- the so-called Tier 1 capital ratio -- would be well above 9% for the 22 banks, compared with a minimum requirement of 4%. Under the stress tests' more pessimistic economic scenario, no bank would see its Tier 1 capital ratio fall below 6%.
The results aren't directly comparable with a more extensive study of the European banking system by the International Monetary Fund, which was published earlier this week. Nor are the results comparable with the U.S.'s stress tests earlier this year.
The IMF said banks in the 16-nation euro zone wouldn't need to raise capital to ensure that banks had at least a 6% Tier 1 ratio, but banks would need to raise $150 billion to increase the ratio to 8% and $380 billion to boost it to 10%.
The adequacy of European bank capital cushions has been a source of friction between European governments and the U.S., which had spilled into meetings of the Group of 20 leading and developing economies, whose leaders met in Pittsburgh last week.
The U.S. is worried that poorly capitalized banks could undermine economic recovery -- as they did in Japan in the 1990s. Ahead of the G-20 meeting, the U.S. proposed that all banks increase capital to comply with a leverage ratio, or total assets as a multiple of equity capital, that would imply the need for major capital-raisings for some big European banks.
European governments, led by France and Germany, succeeded in diluting the U.S. initiative. The capital-adequacy measures used in Europe incorporate capital other than equity and calculate it as a proportion of risk-weighted assets, which are adjusted for their perceived riskiness by regulators. For example, bonds issued by a bank's national government are rated zero.
The IMF calculated that insisting on a leverage multiple of 25, a potential future target for big global banks, would force U.S. banks to raise $130 billion in new capital. But banks in the euro zone would need to raise much more: $310 billion. Those in the U.K. would also need a $120 billion capital boost. These extra requirements would also fall most heavily on big banks engaged in capital markets and derivative activity, bank analysts said.
Even without new rules firmly in place, some banks are taking advantage of buoyant stock markets to boost capital, if modestly. Three European banks announced this week they intended to tap the financial markets for money to boost their capital.
BNP Paribas SA, France's largest bank by market value, announced Tuesday that it would launch a €4.3 billion rights issue that it would use, along with other funds, to pay back the French state for the €5.1 billion in nonvoting shares it bought in BNP.
Two Italian banks, UniCredit SpA and Intesa Sanpaolo SpA, also unveiled capital-raising plans, effectively turning their backs on government-sponsored bonds that had been made available to Italian banks amid the financial crisis and said they would tap the financial markets.
The Italian state-aid packages came with several strings attached -- including restrictions on dividends and bonuses -- so most Italian banks have decided not to take up the government's offer.
UniCredit announced a €4 billion capital increase, while Intesa Sanpaolo said it would issue a Tier 1 hybrid bond worth up to €1.5 billion to strengthen its finances.
Because BNP is buying out a government stake, its Tier 1 ratio rises only slightly from 9.1% from 9.3%. UniCredit's Tier 1 ratio rises to 8.46% from 7.66%, while Intesa's increases to 8.1% from 7.7%, according to bank analysts.
Write to Stephen Fidler at [email protected], Alessandra Galloni at [email protected] and Adam Cohen at [email protected]
Printed in The Wall Street Journal, page C2
