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12th Aug 2022

EU's top banks still far from crisis-proof, regulator warns

  • EU states were forced to set aside more than a trillion euros to prop up risky banks in the wake of the crisis (Photo: eba.europa.eu)

The EU's top banks ought to keep more money in reserve, making them less profitable, in order to prevent another 2008-type crisis, Europe's banking supervisor has said.

The bloc's largest banks had a total capital shortfall of €135bn "under the most conservative assumptions", the European Banking Agency (EBA) in Paris said in a report on Tuesday (2 July).

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The shortfall was measured against new capital rules agreed in 2017 by the so-called Basel Committee, a global supervisory body at the Bank for International Settlements in Basel, Switzerland, which helps its 60 member countries' central banks to work together.

It is far lower than the EU shortfall of €277bn recorded in the immediate wake of the crisis in 2009.

The crisis saw the collapse of US investment bank Lehman Brothers due to excessive risk taking.

Its knock-on effects also forced EU states to allocate €1.6 trillion of state funds in the following years in order to prop up wobbly lenders and generated political momentum for a "banking union", which remains a work in progress.

The new Basel rules, informally called Basel IV, are due to enter into force between 2022 and 2027.

The EU's banks ought to increase their minimum capital levels by 24.4 percent in order to comply, the EBA said on Tuesday.

The figure was a steep hike from its 2017 estimate of 15.2 percent.

But the obligation to hold on to profits instead of reinvesting them or paying them out to shareholders could make European lenders less competitive.

It could also have a cooling effect on Europe's economy.

"Given that these banks are responsible for the large majority of lending to businesses and individuals across Europe, the requirement to hold higher capital levels could have negative consequences for the supply and pricing of bank finance," Michael Lever, from the Association for Financial Markets in Europe, a Brussels-based trade lobby, told the Financial Times.

The EBA survey covered 189 lenders in Europe.

But it said the total €135bn shortfall was being "almost entirely driven by large globally active banks".

Medium-sized EU banks accounted for just €5.5bn of that figure and ought to boost minimum capital levels by 11.3 percent, the EBA said.

Small banks had a €0.1bn shortfall and needed to raise capital by 5.5 percent, it added.

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