Update on the implementation of the capital exercise

11 July 2012

The European Banking Authority published today an overview report on the implementation of the capital exercise. In line with the EBA's Recommendation, the vast majority of the banks in the sample meet the required ratio of 9% Core Tier 1 (CT1). For the few banks that were not fully able to meet the capital level using private sources, backstop measures are currently being implemented to ensure they are in line with the EBA's Recommendation. While the market environments remain challenging, the overall resilience of the European banking system has improved, without any significant adverse impact on lending into the real economy.

Andrea Enria, Chairperson of the European Banking Authority said: "Our work in strengthening the capital base of banks is proceeding to plan. European banks are now in a stronger position, which should support lending to the real economy and gradually restore banks' access to market funding. Significant challenges remain to exit the crisis and comply with the new regulatory standards approved by the G20, but this was a necessary and important step in the process of repairing banks' balance sheets across the EU".

The overview of banks' measures taken to establish capital buffers so as to achieve a CT1 ratio of 9% after prudent valuation of sovereign exposures highlights the following:

  • The exercise led to an aggregate €94.4bn recapitalisation for 27 banks – largely exceeding the €76bn shortfall identified in December - and to a significant restructuring of the remaining 4 banks (See note 1).
  • Compliance with the Recommendation has been achieved mainly via measures which have a direct impact on capital (retained earnings, new equity, and liability management), with an amount of €71.6bn representing 95% of the initial shortfall and 76% of the total measures.
  • In line with the Recommendation, the exercise did not lead to reduced lending to households and corporate or to fire sales of assets. The deleveraging measures agreed as part of the capital plans led to an overall reduction of risk weighted assets (RWAs) by only 0.62% compared with the September 2011 aggregate RWAs. Moreover, those measures were concentrated on a small number of banks that have agreed this reduction with international and EU organisations in the framework of formal restructuring and state aid injections.

As agreed by the European Council on 26 October 2011, for those banks unable to meet the set target using private sources, backstops measures are now being implemented with clear commitments from national governments and, where necessary, EU or international support.
 

Process
 

The approval and monitoring of the implementation of banks' plans were undertaken by National Supervisors in coordination with the EBA. Plans were discussed in Colleges of supervisors to ensure focus was placed on capital measures and on limited reduction in lending to the real economy. This allowed for dialogue about potential concerns regarding exposure levels of banking groups to their subsidiaries in all Member States.

Next steps
 

This overview report is based on preliminary updates as of the end of June on the capital plans provided by the National authorities. The EBA will publish a final report on the exercise in September 2012 based on banks' actual capital positions as at the end of June 2012. The final report will provide information on a bank-by-bank basis.

The EBA and the National Supervisors will continue to monitor the fulfilment of the Recommendation for all banks included in the sample. Where necessary, National Supervisors may undertake a detailed review of individual bank's asset quality to better understand the risks underlying banks' capital positions in a deteriorating environment.

The Recommendation will remain into force until rescinded and work is currently underway to map the transition to the future regulatory framework (CRDIV). The key principle for this transition will be to ensure capital conservation in 2013 and beyond.

Note to the editors
 

(1) Out of the initial shortfall published in December 2011 (€115bn), the shortfall related to Greek banks (€30bn) was identified as a component of pre-agreed arrangements under the EU/IMF assistance programme and is treated separately. In addition, three banks (Öesterreichische Volksbank AG, Dexia, WestLB AG) from the original list of banks with shortfalls have been identified in February as undergoing a significant restructuring process, which the EBA has agreed is an appropriate response to the December Recapitalisation Recommendation. Finally, after the triggering of a restructuring process in early May, the Spanish bank Bankia will be monitored separately by the Spanish authorities in conjunction with the European Commission liaising with the ECB, the EBA and the IMF. Therefore the focus of this recapitalisation overview report is the €76bn shortfall identified for the other 27 banks in the sample.

(2) The EBA Recommendation was adopted by the Board of Supervisors on 8 December 2011 to address the difficult situation in the EU banking system, especially with regard to the sovereign exposures, by restoring stability and confidence in the markets. The Recommendation called on National Authorities to require banks included in the sample to strengthen their capital positions by building up an exceptional and temporary capital buffer against sovereign debt exposures to reflect market prices as at the end of September. In addition, banks were required to establish an exceptional and temporary buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June 2012. 

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