EBA’s latest capital requirements hit Commerzbank
Having long ago surrendered their credibility, European bank regulators can hardly have expected any sharp reaction to the latest revisions of their stress test and associated demands on European banks to recapitalize.
Yesterday the EBA announced that European banks must raise €114.7 billion of additional capital buffers by June 2012, so 8% more than its initial estimate of €106 billion.
Most analysts agree that the EBA’s plan is something of an irrelevance because it fails to address the main challenge facing European banks today, their inability to raise term funding. The ECB, of course, is addressing this, by providing longer-term loans against increasingly weak collateral. That leaves the EBA to indulge in what some might see as wishful thinking.
That’s odd because Commerzbank, the bank hit by the single biggest increase in its capital requirement, which now has to find another €5.3 billion of tier 1 capital up from €2.9 billion previously, explicitly blames EBA deductions for its sovereign exposures to Italy, Greece and Spain for €2 billion of that €2.4 billion increase.
So the buffer is designed to cover sovereign losses, after all? We’re getting confused.
Thankfully, the EBA is here to make it all clear:
Well, that’s all right then.
The EFSF will cap sovereign yields and save the day. We have nothing to worry about.
For its part, Commerzbank had already announced plans to cut risk-weighted assets by €30 billion so as to remove the need for €2.7 billion of this additional capital. If it was still being held to the EBA’s previous estimate it would have been almost home and hosed by now, especially if its €600 million offer announced earlier this week to buy in selected trust preferred securities succeeds in boosting tier 1 capital as planned. Of course cutting RWAs to boost capital ratios raises the awful possibility for bank regulators that they might be blamed for worsening the credit crunch.
In any case, Commerzbank must now also consider other measures, including selling non-strategic assets and even issuing new equity capital instruments, which the EBA has blessed. The EBA has previously insisted that banks’ capital needs “will be met with capital of the highest quality.” But it has changed its definition of what constitutes highest quality now to accept “new issuances of very strong private convertible capital”.
That must please proponents of the Contingent Convertible market, although investors may harbour concerns.
So everyone is happy?
Well, everyone except Eric Strutz, CFO of Commerzbank, it seems:
Commerzbank’s stock price fell 12.5% between the Wednesday close, before the EBA announcement, and this morning’s opening.
What was that again about public funds?