European Regulators Pressure Big Banks to Increase Capital
Banks Encouraged to Raise Capital Well Above Formal Regulatory Limits
LONDON—European regulators are turning up the pressure on large banks to further strengthen their balance sheets amid nagging concerns about Europe’s financial and economic health.
The European Central Bank’s bank-regulatory arm in recent weeks wrote letters to most of the eurozone’s largest banks, instructing some to increase their capital cushions to levels well above formal regulatory requirements and pushing others to improve their corporate governance, according to banking and regulatory officials.
Banking executives say the mounting pressure from the ECB, which last November became responsible for supervising the eurozone’s largest lenders, is likely to translate into a flurry of banks selling new shares, cutting dividends or finding other ways to improve their ability to absorb future losses.
“In 2015, the big players will have to consider capital increases,” said Carlo Messina, chief executive of Italy’s second-largest bank, Intesa Sanpaolo Spa. Mr. Messina and other bank CEOs said in interviews that banks will need to achieve capital ratios well above 11% of their risk-adjusted assets if they want to also pay dividends—a level that could rise much higher for banks deemed particularly risky. “Otherwise you are too close to the level you have to maintain,” Mr. Messina said. While European banks have raised hundreds of billions of euros of new capital in recent years, some large lenders’ capital ratios remain in the high single or low double digits.
One major bank, Spain’s Banco Santander SA, kick-started the capital-raising process earlier this month when it raised €7.5 billion ($8.44 billion) by selling new shares. Santander officials say their unexpected capital hike wasn’t a response to pressure from the ECB, although regulators did welcome the move.
Deutsche Bank AG , meanwhile, is exploring the sale or spinoff of part of its retail-banking business in ways that could boost capital, The Wall Street Journal reported this month. And Société Générale SA this month announced it is splitting the jobs of chairman and CEO, bringing the French bank more in line with what corporate-governance experts consider to be best practices.
The ECB letters reflect lingering concerns among regulators and investors about the financial health of some of the eurozone’s largest banks, even after regulators have repeatedly assured the public that major lenders are on sound footing. Most recently, European “stress tests” in October found that all but 25 of Europe’s top 130 banks have enough capital to withstand a deteriorating economic environment. Most of those 25 were small and midsize banks that said they are already on track to boost their capital.
But with the continent stuck in economic doldrums, ECB officials are scrambling to further fortify top banks, pushing for capital ratios that in some cases are nearly quadruple where they stood before the financial crisis, bank executives say.
The ECB’s Single Supervisory Mechanism, as its new bank regulator is known, started sending out the letters in December. Each letter offers a different capital ratio that the lender needs to hit, based on factors including the perceived riskiness of that bank’s assets and the quality of capital it is currently counting toward regulatory minimums, according to people who have read the letters.
“They say, based on your risks, you need more capital,” said Andrea Enria, the chairman of the European Banking Authority, which conducts stress tests and sets regulatory standards across the European Union. The letters are partly a response to significant discrepancies in how different banks calculate capital, Mr. Enria said.
Some bank CEOs say they received letters that also included a focus on strengthening their financial transparency and their corporate governance.
The ECB gave banks a few weeks to accept or reject the findings of the letters, or to argue that they already have laid out plans to fill any capital holes, these people said. Many banks submitted their responses in the past two weeks. Next month, the ECB will go back to the banks with final verdicts about what steps they need to take, likely setting in motion the capital-raising process, the people said.
The letters are likely to become an annual rite, part of the ECB’s Supervisory Review and Evaluation Process, known in industry circles as SREP, according to regulatory officials.
The tougher ECB demands have been the source of grumbling among bank executives gathered at last week’s World Economic Forum in Davos, Switzerland. The regulations are “totally a moving target,” said the CEO of a major eurozone bank. “It reduces the flexibility you have,” another said. Others said it would constrain lending.
“If you push up capital ratios, obviously credit is a little bit reduced by that,” Bank of Italy Governor Ignazio Visco said in an interview. “The banks may be right there needs to be greater consistency. This is a learning process.”
Not all bank executives are complaining, though. Mr. Messina said Intesa is one of the few institutions that already has plenty of capital. “I have a competitive advantage that is unique,” he said.