8/3/2019 European Banks Re Capitalization

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European banks’ recapitalization

When the EBA stress tests on 90 European banks were published in July, I titled them a mockery.Iconducted my own analysis according to a 50% and 75% haircut on sovereign debt inPIIGS countries to abide by the 9.5% core capital to be reached by 2019 according toBasle III rules (many banks said they would get there well ahead of time): this analysis producedthe numbers I mentioned in several articles on this blog.

In the table below, let’s look at German and French banks’ exposure to the Greek sovereign debt(being the main holders, I do not include other banks):

A 50-75% Greek default would result EUR 36 and 40 billion new capital required, split1/3 for Germany and 2/3 for France. This does neither take into account their exposure to thebanking and private sector nor guarantees/commitments/derivatives (including CDS). The Germansituation is not much worse with respectively EUR 9.7 billion additional exposure (including EUR 2.1billion with Greek banks) and EUR 5.3 billion; French banks’ are in a much more difficult positionwith EUR 43.5 billion (including EUR 1.6 billion for banks) and EUR 8.3 billion.

8/3/2019 European Banks Re Capitalization

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To be fair, these numbers reflect the situation at the end of December 2010 and French bankshave significantly reduced their exposure on their Greek sovereign debt during H12011: BNP Paribas from EUR 5 billion to EUR 3.5 billion and Société Générale from EUR 2.7 toEUR 1.9 whilst producing a net 6 months result of EUR 4.7 billion and EUR 1.6 billion, so enough toabsorb a 100% default. However, as for Dexia that went under mainly because of its exposure to thenon-sovereign credit book, I do not know what the quality of the private book is. 

Let’s add a 100% default on Greek banks and 15 % on the private sector (guarantees andcommitments included but not derivatives), the banking needs required to abide by Basle IIIrules is north of EUR 50 billion for German and French banks that were subject to the EBA 

stress test.

The total number of EUR 100 billion rumored to be in the starting blocks torecapitalize European banks is probably right on a Greek basis alone. In order to weighthe minimum possible on government budgets already under dramatic strain, this recapitalizationshould be undertaken via profits, cutting dividends to zero and reducing bonus payments (say by thesame amount as the Greek default). It is however far from addressing the rest of BIGSPIFsovereign risk .

Nevertheless, the EUR 100 capitalization does not address the core of the matter: the sovereigninsolvency and lack of economic competitiveness. More on this in a forthcoming article: France - EZweak link.

BIGSPIF: Belgium, Ireland, Greece, Spain, Portugal, Italy, France