New Study Quantifies European Banks' Capital Shortfalls as Stress Tests Loom

By Adam Creighton 

Europe's banking giants, including HSBC Holdings PLC, Deutsche Bank AG and UniCredit SpA, would need to raise more than EUR253 billion ($280 billion) in capital to meet the robustness standards specified by the U.S. Federal Reserve, rising to more than EUR572 billion in a crisis situation, according to new analysis released Friday.

The figures, compiled by New York University's Viral Acharya and others, dwarf the EUR25 billion shortfall the European Banking Authority said the Continent's largest banks would need to raise in 2014. The study was released hours before the EBA is due to give its stress-test results for 2016 at 10 p.m. CET (4 p.m. ET).

Prof. Acharya's study of 34 of the largest European banks, with more than EUR23 trillion in assets, also found they would need to raise more than EUR1.19 trillion, potentially from governments, to have enough equity to withstand another financial crisis.

"The European banking sector requires a comprehensive recapitalization across almost all countries including not only peripheral countries such as Italy and Spain but also large core European banks in Germany and France, in particular," the paper said.

Europe's largest banks have shed more than 35% of their market values since the EBA's 2014 stress tests, and as of June 30 their average ratio of market value to book value was 70%, the paper said. "This ratio was above one in November 2014 and highlights the increasing concerns of market participants on bank asset quality compared to the valuations of bank assets in their balance sheets," according to the study.

Prof. Acharya's analysis calculates banks' leverage ratios, or equity as a share of total assets, based on their current stock-market valuations.

"When a bank's market value of equity is approaching zero, it doesn't matter what the book value of a bank's equity is compared to what investors believe it actually is; Lehman's was positive when it collapsed," Prof. Acharya said in an interview.

The market value of the French, Italian and German banks in the study, as a share of their total balance-sheet assets, had fallen to 2%, 2.9% and 1.1%, respectively -- far below the minimum 4% leverage ratio the Fed specified in its latest round of stress tests. Deutsche Bank's market-based leverage ratio was 1% and troubled Italian lender Banca Monte dei Paschi di Siena SpA was 0.57%, he found.

Five French banks, including BNP Paribas and Société Générale, would require EUR173 billion of new capital, equivalent to 7.9% of France's GDP, to meet a 4% leverage ratio in a crisis situation -- more than any other banking system in both absolute and relative terms, the study found.

Bank of England Gov. Mark Carney, in a letter to Group of 20 finance ministers earlier this month, said international regulatory frameworks for banks were "largely settled," however. "Authorities are committed to not significantly increasing overall capital requirements across the banking sector," he said.

Prof. Acharya said European banking regulators' inability to compel banks to raise capital -- by banning dividend payouts and "bailing in" of subordinated debt, for example -- showed they had been "captured" by financial interests. "It's a classic case of shareholders and bankers not wanting to do what's in interests of the bank, but rather their own interests," he said.

Write to Adam Creighton at [e-mail]

(END) Dow Jones Newswires

July 29, 2016 15:02 ET (19:02 GMT)

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