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14th October 2011

EC President seeks leap in bank capital

European Commission President Jose Barroso has urged a major increase in Core Tier 1 (CT1) Capital for the systemically important European banks as a way to solve the concerns regarding the banks exposure to South European sovereign debt. When asked to quantify this he suggested that as a temporary measure the banks be required to hold 9% CT1. To bring this in quickly would be to effectively short circuit the slow introduction of Basel III requiring banks to hold between 7% and 9.5% CT1 with the systemically important at the 9%-9.5% level. It also compares with a 5% pass level under slightly stressed conditions for the second quarter European Stress test.


Voters in a number of countries and notably Germany are reluctant to provide finance to Greece and other countries believing that it would be rewarding those counties for running up unaffordable debts and penalising the prudent and cautious countries inhabitants. Barrosa presumably is banking on the fact that the voters in the not at risk countries would be more willing to assist their own banks to be strengthened to a European agreed 'safe level'.


Borroso seems to have made this proposal without first holding any extensive consultations as was the case with his other recent intervention proposing the introduction of the Tobin tax (a tax on all financial transactions between financial institutions). It will be argued that the proposal places an unreasonable burden on banks that have never held or have already got rid of the majority of the sovereign debt in countries subject to repayment ability speculation. On the other hand even a 9% CT1 would leave certain other major banks quite weak if there were significant sovereign debt or bank bond writedowns in countries such as Spain and Italy.


Josef Ackermann, Deutsche Bank CEO and Chairman of the Institute of International Finance, criticised the proposal arguing that the only way for banks to move quickly to the capital levels proposed would be with state assistance. The consequence would be higher sovereign hence defeating the benefit. He added that Deutsche Bank would do everything in its power to fight such a proposal.