Europe's banking regulator may need to bare its teeth to make sure its plan to fill a gaping capital hole is not left open to ridicule if lenders use over-optimistic assumptions on economic growth and asset sales. Thirty-one banks must tell their national regulators on Friday how they plan to fill a 115-billion-euro capital gap aimed at helping restore confidence in the industry at a third public attempt.
It will then be up to the European Banking Authority's (EBA) Chairman Andrea Enria and his board to accept the plans or push them back. "The question is whether the member states collectively give Enria the moral authority to do it and don't undermine him," said Graham Bishop, a former banker who advises EU institutions on financial regulation.
Germany's Commerzbank has based its plan on no deterioration in the economy, Italy's Banca Monte dei Paschi di Siena assumes it will be able to sell assets by the end of June, and others plan to use profits or shrink assets - both unpredictable in tough markets - to meet targets. A banking industry official said: "Having set the criteria it (the EBA) has got a duty to review the plans of individual banks robustly and comment on them."
Only Italy's UniCredit has so far tapped shareholders for cash to meet its shortfall, and the expectation is that less than 10 billion euros of new equity will contribute to the capital rebuild. Instead, banks plan to retain earnings, shrink loans to customers, convert hybrid debt into equity, buy back their own bonds, sell assets, and cut dividends or staff pay.
Under the recommendation, which EBA's board made up of supervisors from all EU states approved in November, individual supervisors must comply or else explain for any discrepancy. "The issue of recapitalisation is one of the best signs of the power struggle between intergovernmentalism and federalism in the EU," said Karel Lannoo, chief executive of Brussels think-tank CEPS.