A survey by Ernst & Young (EY) of European banks confirms that a sizeable proportion are expected to issue equity and sell assets to meet regulatory capital requirements in the coming 12 months. The findings lend weight to concerns that the eurozone crisis is not ended but in remission and could be re-activated.
EY said that across 294 banks surveyed, 8% “fully expect” to have to raise further capital after the European Central Bank’s (ECB) asset quality review (AQR) of the largest euro-area banks, while another 20% think they might have to.
The AQR aims to ensure that all banks under the ECB’s supervision have sound balance sheets with no hidden risks, before the central bank begins supervising them directly from November onwards.
The survey found that so-called ‘zombie’ and other banks, particularly in the eurozone’s most stricken nations – Greece, Spain, Portugal, Ireland, Italy and France – are those making preparations ahead of the review. Predictably, there are major discrepancies from country to country. Only 4% of German banks believe they might need more funds, whereas 35% of Spain’s banks anticipate they will.
Daniele Nouy, the head of the ECB’s new pan-euro area banking supervision authority, said at a recent conference that the AQR and parallel Europe-wide bank stress tests due to be published in October will reveal capital shortfalls at some banks. These “banks will have to build up capital buffers, thereby leading to more resilience in the financial system,” she added.
The ECB’s supervisory unit will monitor some 130 of the largest euro-area banks which represent nearly 85% of total banking assets in the eurozone.
The AQR scrutiny covers banks’ loan portfolios, valuations of bonds and financial derivatives. Around 6,000 official supervisors and auditors hired from private sector consultancies are now working on the AQR on site at banks, according to Nouy.
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