Banks across Europe could be forced to move nearly half a trillion euros in assets to comply with new EU financial services regulations, ratings agency Fitch has found.
If EU regulators opt for the toughest new rules regarding how government debt should be classified on balance sheets, banks would need to raise another €135bn (£105bn) in capital. Alternatively, they could reallocate existing assets worth €492bn in order to meet the new guidelines.
The rules, currently being discussed by EU finance ministers, are designed to break the link between national governments and financial institutions by forcing lenders to hold capital against government debt - something most banks in the EU do not currently do.
European banks - inside and outside the Eurozone - held €2.3 trillion of sovereign debt in 2015, with 65 per cent belonging to their “home” country.
Fitch said the hundreds of billions would need to be raised, mainly by Europe’s smaller banks, if regulators took “an approach designed to penalise excessive concentrations”. A more lenient set of requirements on the holding of national debt could still see banks need to raise an extra €12bn.
By potentially discouraging - or making it more expensive - for banks to hold sovereign debt of their home countries, the cost of government borrowing could also go up, “particularly for lower-rated” countries, Fitch said.
The largest lenders, so-called “global systemically important banks”, of which Fitch identified 12 in the Eurozone, would be least affected as most currently have internal models which account for the risks associated with holding government debt.