* Losses on bonds, recaps could hit fragile economies* Greece banks could endure loss on bonds of up to 30 pctBy Philipp Halstrick and John O’DonnellFRANKFURT/BRUSSELS, Oct 13 (Reuters) - European banks could
get up to six months to strengthen their capital under plans
aimed at halting the region’s debt crisis, giving them time to
raise funds privately in the hope of averting another damaging
credit crunch.EU officials said on Thursday that weak banks may get the
extra time to bolster their balance sheets after a rapid health
check currently underway.Euro zone leaders are insisting that banks recapitalise, in
an attempt to halt the euro zone crisis and shore up investor
confidence.”A three- to six-month deadline is being considered,” said
one EU official, speaking on condition of anonymity. “No
decision has been taken.”The plan means Deutsche Bank and other top
European banks could have to raise billions of euros to meet a 9
percent core capital target and withstand hefty losses on
sovereign bonds.The European Banking Authority, which is assessing banks’
capital needs, is likely to mark down the value of banks’
holdings of sovereign debt to market value and require lenders
to hold a 9 percent core Tier 1 capital ratio, an EU source told
Reuters.Deutsche Bank, Germany’s flagship lender, would need 9
billion euros in fresh equity to reach that level, two people
with direct knowledge of the bank’s finances said on Thursday.Deutsche Bank declined to comment, but in separate remarks
the bank’s chief executive Josef Ackermann said it would do all
it could to avoid a forced recapitalisation and added it had
enough funds of its own to cope with a crisis.Setting the bar at 9 percent would leave European banks with
a capital shortfall of about 260 billion euros, based on a
two-year recession and applying current market prices to
holdings of Greek, Irish, Italian, Portuguese and Spanish
government bonds, according to Reuters Breakingviews data.Royal Bank of Scotland , Unicredit ,
Deutsche Bank, BNP Paribas and Societe Generale
would all need over 12 billion euros based on that
data. Some 67 of 90 banks tested would need capital.Banks are already attempting to sell assets and shrink their
loan books to lift capital ratios. They could also be told to
cut pay for staff and dividends for investors to preserve cash.But that could force them to cut lending to
companies and risk derailing economic recovery, bankers have
warned.”We need to find the right balance between stricter
regulation of the financial sector and the impacts these have on
the economy as a whole,” Ackermann said.All banks will be looking to cut back on lending
that uses a lot of capital and costly funding such as asset
finance, unsecured consumer finance, trade finance and some
business lending, analysts at Morgan Stanley said.”The risks of a big credit squeeze are very real, and we
hope the methodology and process looks to limit this,” said Huw
van Steenis, analyst at Morgan Stanley.PRIVATE FUNDS… THEN TAXPAYERSEuropean officials said banks should first turn to private
investors rather than governments to improve capital, signalling
that they needed time to do this.”The timeline is very important,” said one official. “The
current market circumstances are not ideal. At the same time, we
need to (regain) confidence as soon as possible.”There is likely to be limited private funding available for
banks, leaving many at risk of needing taxpayer funds or the new
euro zone EFSF rescue fund as a last resort.Greece’s banks could have to raise over 30 billion euros
under the plan, as they face big losses on their holdings of
domestic bonds.Banks are facing losses of 39 percent on their Greek bonds
under a private sector rescue plan agreed in July, above the
original estimate of a 21 percent hit, due to a rise in Greece’s
risk profile.Greek banks could endure a loss of up to 30 percent on the
bonds but could not stand significantly bigger haircuts, which
would also hurt the economy, Greek banking sources said.European leaders are still discussing the recapitalisation
plans, with many details still subject to change, and face
intense lobbying from banks and some countries who say it is too
harsh. Proposals are expected to be presented to a meeting of
European leaders on Oct. 23.The new standard is likely to be a 9 percent core tier 1
ratio, a key measure of a bank’s financial health, based on a
tighter definition of capital than used now, although not as
strict as that under new Basel III rules when in full forceAnalysts at Credit Suisse said a 9 percent capital level
would leave banks in need of 220 billion euros, with RBS,
Deutsche Bank and BNP Paribas most in need.Ackermann, Germany’s most high-profile banker, said it was
doubtful whether a blanket recapitalisation of European banks —
a measure being considered by politicians in Germany and France
— would help solve the sovereign debt crisis.”It is not the capital position which is the problem, but
the fact that sovereign debt as an asset class has lost its
risk-free status,” Ackermann told a conference in Berlin. “The
key to the solution is therefore in the hands of governments, to
restore confidence in the solidity of state finances.”
