EU banks are struggling to turn a profit. They are faced with a slowing economy, negative bond yields and ongoing balance sheet restructuring. The last thing they need, therefore, is for the European Banking Authority (EBA) to take a hard line on the implementation of Basel III.
But that’s exactly what they got in the recently published advice to the European Commission, which estimates they will need to rebuild their capital base to the tune of €135bn by 2027.
The EBA suggests that only €58.7bn of this would need to come from new capital raising if banks retain profits to rebuild their capital base. But it then adds that “this shortfall is mostly borne by institutions that did not make any profits between 2014-2018”.
The capital raising disproportionally hits large cross-border banks, mainly global systemically important institutions, as well as mortgage banks; in other words, the banks that should be driving the integration of the eurozone and banking union.
The EBA recommends that no EU-specific supporting factors for SME and infrastructure lending exposures are retained. Frankly, if large banks got their act together on lending to SMEs with proper old-fashioned due diligence (as some challenger banks are doing), there would be no need for special treatment.
But faced with jacking up capital on this scale and losing exemptions (if the EBA proposals were fully implemented), large European banks will find themselves struggling and all types of borrowers will find the going tough. Hardly what is needed for a eurozone recovery.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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