All of the 90 banks covered by the EU’s stress tests – including the UK’s major lenders – will be included in a programme to get their capital up to “a temporary significantly higher capital ratio of highest quality” than the scheme to which lenders are correctly working.
The minimum core tier one capital-to-assets ratio for large banks under Basel III will eventually move up to 9.5 per cent, but Barroso specified that the EU plan will require banks to get to this level or higher “as swiftly as possible” and to calculate their capital base after write-downs on their sovereign bonds.
The plan also implied that banks that don’t reach the required level should be forcibly recapitalised by governments – or by the Eurozone bailout fund if states cannot afford it. It is not clear what time frame banks will have to comply, though some reports suggested six to nine months.
The plan could prove controversial because it will force banks to cut lending and investment even as economists warn of an impending credit crunch.
Bankers also believe it will be difficult to raise capital on the open market as investors are reluctant to put money into a sector with depressed returns and low dividends. As City A.M. revealed yesterday, there is growing disquiet among bankers over the prospect of a large-scale forced recapitalisation in Europe.
José Manuel Barroso presented the outlines of a European rescue plan yesterday, the centre-piece of which was a recapitalisation plan for EU banks.
Details were scarce, but it will require banks to significantly accelerate their capital-raising to comply with Basel III rules as soon as possible or face forced bailouts. The plan should please Germany because it requires sovereign states to bail out banks before tapping the collective Eurozone bailout fund, a key demand from Berlin.
Many of the other measures are fairly standard reiterations of the commitment to make Greece curb its spending and speed up reforms to make European economies function more competitively.
But, significantly, Barroso emphasises that the crisis plan will involve treaty changes that will give the EU the power to scrutinise member states’ budgets and request amendments and second readings if it deems them inappropriate.
The document also suggests a financial transaction tax be introduced as soon as possible “to ensure that the financial sector contributes fairly”.