Agreement on bank recapitalisation

Emergency package seeks to shore up the shaky banking sector.

The European Union’s 27 member states agreed to an emergency package of bank recapitalisation to shore up the shaky banking sector when leaders met on 26 October. Banks will be forced to increase to 9% the ratio of the highest-quality capital, known as core tier one, by the end of June 2012. 

In all, the recapitalisation will total €106 billion. It will be overseen by the European Banking Authority (EBA), which carried out assessments of the capital positions and sovereign exposures of 70 of Europe’s largest banks.

At the conclusion of the talks, Herman Van Rompuy, the president of the European Council, said that the banks should raise capital from the private sector where possible. If member states were unable to provide the necessary capital, the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), could be used as a last resort, Van Rompuy said.

The EBA said that banks in Finland, Hungary, Ireland, Luxembourg, Malta, the Netherlands and the UK did not need additional capital, while those in Greece required €30bn and those in Spain needed €26bn.

The initial assessment is based on the banks’ balance- sheets in June, but the EBA will be disclosing a revised figure at the end of November based on September figures. Individual banks are being asked to declare their capital and sovereign-debt positions.

The EBA said the objective of the capital exercise was “to create an exceptional and temporary capital buffer to address current market concerns over sovereign risk”.

The authority added: “This buffer would explicitly not be designed to cover losses in sovereigns, but to provide a reassurance to markets about banks’ ability to withstand a range of shocks and still maintain adequate capital.”