Big Eurozone Banks Ordered to Increase Capital Levels
Europe’s new banking watchdog has ordered the biggest eurozone banks to increase their capital levels by 0.5 percentage point on average after a yearlong assessment of their risks.
The so-called Single Supervisory Mechanism, established in late 2014 as part of Europe’s efforts to head off its debt crisis, warned in a report published on Friday that overall risks for the roughly 130 large eurozone banks it supervises have “not decreased compared to 2014.”
It said many banks were still recovering from the 2012 financial crisis and “they continue to face risks and headwinds.” The biggest risk consists in adapting their business models to a new environment of low interest rates, the supervisor said.
It is first time that the eurozone’s single banking watchdog has reviewed the riskiness of the bloc’s biggest banks based on a common standard. The task previously fell to national regulators, who took different approaches to capital levels and business risks.
The review aims to restore confidence in Europe’s battered banking sector, which has come under renewed pressure in recent weeks amid broader concerns around the health of the global economy. The MSCI Europe Financials Index has fallen more than 15% so far this year.
The report shows that five banks fell short of common equity Tier 1 capital requirements, a widely used measure of a bank’s financial strength, including one that fell significantly below the required level.
To assess the strength of the banks, the supervisor looked at four elements: business models, governance and risk management, risks to capital and risks to liquidity and funding. Its additional capital demands consisted of a 0.3-percentage-point increase based on its own assessment of risks, and a further 0.2-percentage-point for capital buffers that are being gradually phased in.
The review provides “a holistic view of banks’ risk profiles,” and also uses forward-looking elements such as stress tests, said Korbinian Ibel, director general at the European Central Bank responsible for microprudential supervision. Mr. Ibel said the SSM had hired more than a thousand staff since its establishment in late 2014 and was now “the biggest supervisor in the world.”
Each bank is graded on a four-point scale, and receives a decision document that may include additional capital or liquidity requirements or other demands, such as restrictions on certain businesses. Those documents are confidential but banks may choose to publish them.
The SSM is housed within the ECB in Frankfurt, and the banks it supervises account for around 85% of all eurozone banking assets.
Source: Dow Jones