EBA’s latest capital requirements hit Commerzbank

Euromoney Skew

December 09, 2011

Having long ago surrendered their credibility, European bank regulators can hardly have expected any sharp reaction to the latest revisions of their stress test and associated demands on European banks to recapitalize.

Yesterday the EBA announced that European banks must raise €114.7 billion of additional capital buffers by June 2012, so 8% more than its initial estimate of €106 billion.

Most analysts agree that the EBA’s plan is something of an irrelevance because it fails to address the main challenge facing European banks today, their inability to raise term funding. The ECB, of course, is addressing this, by providing longer-term loans against increasingly weak collateral. That leaves the EBA to indulge in what some might see as wishful thinking.

It claims:

“These buffers are explicitly not designed to cover losses in sovereigns but to provide a reassurance to markets about the banks’ ability to withstand a range of shocks and still maintain adequate capital.”

That’s odd because Commerzbank, the bank hit by the single biggest increase in its capital requirement, which now has to find another €5.3 billion of tier 1 capital up from €2.9 billion previously, explicitly blames EBA deductions for its sovereign exposures to Italy, Greece and Spain for €2 billion of that €2.4 billion increase.

So the buffer is designed to cover sovereign losses, after all? We’re getting confused.

Thankfully, the EBA is here to make it all clear:

“The sovereign capital buffer is a one-off measure and, once the deployment of the new EFSF’s capacity becomes effective in addressing the sovereign debt crisis by lifting sovereign bond valuations from today’s distressed prices, the EBA will reassess the ongoing need for and size of capital buffers against banks’ sovereign exposures.”

Well, that’s all right then.

The EFSF will cap sovereign yields and save the day. We have nothing to worry about.

For its part, Commerzbank had already announced plans to cut risk-weighted assets by €30 billion so as to remove the need for €2.7 billion of this additional capital. If it was still being held to the EBA’s previous estimate it would have been almost home and hosed by now, especially if its €600 million offer announced earlier this week to buy in selected trust preferred securities succeeds in boosting tier 1 capital as planned. Of course cutting RWAs to boost capital ratios raises the awful possibility for bank regulators that they might be blamed for worsening the credit crunch.

In any case, Commerzbank must now also consider other measures, including selling non-strategic assets and even issuing new equity capital instruments, which the EBA has blessed. The EBA has previously insisted that banks’ capital needs “will be met with capital of the highest quality.” But it has changed its definition of what constitutes highest quality now to accept “new issuances of very strong private convertible capital”.

That must please proponents of the Contingent Convertible market, although investors may harbour concerns.

So everyone is happy?

Well, everyone except Eric Strutz, CFO of Commerzbank, it seems:

“As of today and resulting from the new, tighter requirements of the EBA we have to increase our Core Tier 1 ratio to considerably more than 10% by June 30, 2012. Thus the EBA is going far beyond the tougher minimum ratios of Basel III which are not applicable for another six years, i.e. from 2018 onwards only. Two things are important for us in this respect. Firstly: We are aware of our responsibility for the supply of credit to the German economy and we will continue to stand by our customers and particularly will continue to support the Mittelstand. Secondly: We stand by our intention not to make use of additional public funds."

Commerzbank’s stock price fell 12.5% between the Wednesday close, before the EBA announcement, and this morning’s opening.

Analysts at CreditSights say:

“Commerzbank is adamant it will not need further state support, but we are not confident that it will be able to generate the capital internally.”

What was that again about public funds?

- Euromoney Skew Blog