Courtesy of Mish.
At the risk of incurring another nonsensical fine for quoting someone on leverage and capital ratios of French banks, please consider European Banks Face $1 Trillion Gap Before Review.
European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study.
French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote.
“A comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks,” the authors wrote, referring to the central bank’s Asset Quality Review stage of the Comprehensive Assessment.
Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.
“Our results suggest that with common equity issuance and haircuts on subordinated creditors, it should be possible to deal with many banks’ capital needs,” the authors wrote. “Some will, however, require public backstops, especially if bail-ins are difficult to implement without imposing losses on bondholders, who may themselves be other banks and systemically important financial institutions.”
Particularly the banking sectors in Belgium, Cyprus and Greece “seem likely to require backstops,” they said.
Shortfall? What Shortfall?
To ensure there will not be any major capital shortfalls in the next round of stress-free tests, please note ECB Waters Down 2014 Stress Tests Second Time
In what translates into yet another sham stress test, the ECB reduced bank capital requirements from 8% to 6% then effectively declared all sovereign bonds held in non-trading portfolios to be risk-free.
Without a doubt, banks will put all their sovereign bonds in hold-to-maturity buckets (at least for the duration of the stress test).
Fine Update
In case you missed it, please note Mish Fined 8,000 Euros for Quoting French Blog.
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