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Banks brace for capital shake-up, fears linger

Frankfurt, September 9, 2010

Tougher new Basel III capital rules due on Sunday have rekindled concerns over the weakest players in the banking sector in Europe.

The impact of the new bank rules on lending and faltering economic recovery have added to investor doubts globally.

Though long in coming, the pending Basel III rules have also caused concern, as bankers brace for higher capital requirements and tougher penalties if they fall short of them.

Banks now operating with an effective minimum core Tier 1 capital ratio of about 2 percent of top quality capital are bracing for that figure to rise to 7 to 9 percent, officials and regulatory sources have said.

That is expected to include a minimum base core Tier 1 capital ratio of 4.5 to 6 percent and an additional 'buffer' of 2 to 3 percent.

Any bank that fails to keep above that would have to curb payouts such as bonuses and dividends. Commerzbank, Germany's second largest, said on Thursday it may need to raise new equity and take other steps as it aims to repay almost 20 billion euros ($25.41 billion) it owes to the government.

'It will most likely not be one flower but a bouquet,' chief executive Martin Blessing said of the steps required if the bank is to meet its repayment target of 2012.   

A day earlier, European Central Bank Executive Board member Juergen Stark warned German lawmakers that the country's banks were undercapitalised, comments which hit the euro.

With Irish taxpayers out of pocket a similar amount, Finance Minister Brian Lenihan faced increasing pressure to spell out how the government would contain the problems of nationalised Anglo Irish, a concern that dented demand for Irish Treasury bills on Thursday.      

Analysts expect most of Europe's leading banks to be fine with that but a climate of increasing regulation, both in Europe and globally, coupled with fears over an economic slowdown, spell trouble for some.   

European Union finance ministers this week agreed to a sweeping overhaul of how the bloc's financial industry is policed while the European Central Bank said it would continue to dismantle its support for the sector in 2011.

The latter is a worry for banks with capital shortfalls cut off from normal interbank lending and being supported by the ECB, which Commerzbank's Blessing noted was a reality faced by half of Germany's banks.   

'In the short and medium term I do not expect a credit crunch due to Basel III. In the long run the various regulatory measures could make investments in banks less attractive,' said Deutsche Postbank chief executive Stefan Juette.

'That would make it harder for banks to raise capital in say 2015 or 2018. As a result of that banks might be able to do less (lending).'    

Deutsche Bank board member Juergen Fitschen told bankers gathered in Frankfurt that the risk of a credit crunch in the real economy had not abated, noting rising demand for loans spurred by a rebound from the global financial crisis. - Reuters   




Tags: Europe | recovery | banking rules | Basel III | Capital ratio |

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