European bank balance sheets are set to shrink, but bankers and regulators alike should think carefully about how to divest assets.
Days after his appointment as chair of the Financial Stability Board, Bank of Canada governor Mark Carney told an audience in London that he believed European banks might be forced to sell between $1400bn and $2500bn of assets in total over the coming years. This deleveraging stems from the need to meet the new 9% capital adequacy requirement set by the European Banking Authority, which takes effect in June 2012. And the target must be met in the context of rising impaired assets and lost wholesale funding, especially in dollars.
Analysts at Morgan Stanley suggest that much of the increase in capital adequacy may come from asset sales rather than equity-raising, not least because €1bn of extra capital may do little to change funding market sentiment toward a given eurozone bank. They concur with Mr Carney’s estimates, which amount to as much as 5% of European bank assets, and believe much of this could happen over just two years.
This is a serious drag on Europe’s stuttering economies. Much attention among regulators has focused on capital, but if Mr Carney is right, new approaches to funding assets are also vital. Bringing pension funds into infrastructure finance is one strand (see leader below).
But so too is a restart of the much-maligned securitisation markets, because not everything can be funded by covered bonds. The first European collateralised loan obligation since the financial crisis was used by RBS as a means to divest €1.4bn from a non-core portfolio of leveraged loans. It takes innovation to design structures that overcome the understandable fears of real money investors that were generated by the flawed pre-crisis securitisations. A temporary waiver on the clause of the latest European Capital Requirement Directive that requires banks to hold 100% capital against securitisation tranches might be one way to encourage a revival of this market.
Worryingly, the deleveraging also appears to be undermining European integration itself. The Austrian National Bank’s instruction in November 2011 ordering its banks to limit capital and liquidity commitments to central and eastern Europe, and Commerzbank’s similar decision a few days earlier, fly in the face of European solidarity. And these measures may make little financial sense for the affected banks, given that public and private debt levels are generally lower and growth prospects higher in the newer EU members than in the core eurozone, to say nothing of its troubled Mediterranean members.
