EUROPEAN banks need to find €485bn in new capital and €1.9 trillion in new liquid assets in order to comply with tough new Basel III rules, the European Banking Authority (EBA) said in a report yesterday.
The EBA’s report also highlighted the degree to which banks are being forced to rely on buying public debt to fulfil the requirements.
Fifty-four per cent of banks’ liquid assets “eligible” to count towards liquidity requirements are publicly guaranteed, being made up of instruments issued by central banks, sovereigns or other public entities.
Another 30 per cent are made up of cash hoarded at central banks. The heavy reliance on such assets is due to the Basel Committee’s insistence that only publicly guaranteed assets are “risk-free”, making them by far the least costly way to fulfil Basel III’s liquidity requirements.
The EU agency said that its findings were valid as of June last year, since which there has been significant progress. But although banks have already started to raise some of the total, the EBA emphasised the scale of the challenge by pointing out that lenders’ net profits for June 2010 to June 2011 were just €102bn.
The huge shortfall in capital means that banks are likely to have to deleverage and so cut lending, issue shares, sell assets and rejig the composition of their balance sheets to meet requirements.
And as City A.M. revealed in January, international regulators are becoming convinced that it is no longer tenable to treat sovereign debt as “risk-free” given the crisis in Europe.
There are also fears that the rules are exacerbating the “sovereign-bank feedback loop”, with public debt problems spreading instantly to the financial system.
But if Basel III scraps the “risk-free” designation, it could significantly increase costs for banks.
Meanwhile, EU finance ministers have agreed to hold an extra, urgent summit to thrash out a deal on Brussels’ version of Basel III. The row over the capital rules was one of the major sticking points at the December “veto” summit, with the UK arguing that the current draft won’t allow it to implement the Vickers or macro-prudential reforms. The extra summit will be held on 2 May before a final negotiation between all EU bodies.