Europe’s banks told they have €280bn hole

EUROPE’S banks have a capital hole of €280bn (£233bn) and will have to issue €180bn in new equity to plug the gap, analysts at PwC estimated yesterday.

The tide of new rules and clarifications around capital requirements, leverage rules and risk weightings is expected to push the requirements to the top of lenders’ agendas.

And although regulators are expected to formally give banks several years to hit the targets, analysts believe the lenders will rush through much of the changes in the next year.

In particular the authors expect the leverage ratio to increase capital requirements.

The leverage ratio is of particular concern to low-risk lenders, for instance those who focus on prime mortgages, because this ratio is not risk-weighted, unlike other capital requirements.

“We expect 2014 to mark a big shift of emphasis, from de-leverage on the asset side – disposal and de-risking of assets – to de-leverage on the liability side – capital raising and restructuring,” said PwC’s Miles Kennedy.

“This will be a dramatic shift, arising from a combination of necessity, good sense and opportunity.”

On top of that, Kennedy fears the European Central Bank’s wide-ranging assessment of banks’ asset quality and capital positions will find the gap is even larger.

Although the changes may be painful in the short term, PwC expects it will create a stronger system with a level playing field between banks across the EU.

“These challenges, frictions, market distortions and competitive biases are only short term phenomena, resulting from the legacy of an over-levered banking industry,” the report argued.

“There is a chance to take a somewhat less painful path: with economic confidence gradually returning and investors more or less reconciled to the reality of a less levered bank sector, there is a chance for banks to make a virtue of necessity and restructure their capital.”

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April 22, 2014, 2:25pm