Mon. Oct 18th, 2021

European banks have the gap to dramatically close new global capital standards that are in full force in 2028, after pandemic restrictions on dividend payments boosted balance sheets last year despite a turbulent economy.

Analysis published by the European Banking Authority on Wednesday shows that a group of 99 banks in the EU need to increase their tiger-one capital of the highest quality – composed mainly of money invested by shareholders and profits and banks of previous years retained – with only € 3.1bn to meet the global banking standards of Basel III by the full implementation date in 2028.

The capital gap based on the banks’ positions in December 2020 is sharply lower than in December 2018, when 113 banks had a deficit of € 24.8 billion, and in December 2019, when 106 banks had a deficit of € 9, 6 billion.

Capital remains a lively issue in Europe a decade after the financial crisis, with a deficit consolidation in markets like Italy, while investors are anxiously awaiting the European Commission’s ruling on the extra buffers they will have to keep.

The Commission will announce the rules at the end of October. The EBA has frame a capital gap of € 17.4 billion against 99 banks from December 2020, based on the EU-tailored version of Basel III.

Capital deficits will be concentrated among a small group of large banks, whose ratio between capital and assets will be affected by the Basel Committee’s efforts to limit the use of aggressive models by banks to flatter their statistics. Some smaller banks will see their capital requirements decline as a result of model reform.

Late last year, European banks had an average tier-one ratio of just under 17 per cent, including rates of more than 20 per cent in Belgium and Ireland, and around 15 per cent in Portugal and Greece, according to data from the European Central Bank .

Line chart of level 1 ratio (%) of the EU and selected EU countries showing that European banks boosted equity through the pandemic

The rates are helped by a dividend ban which forced European regulators from March 2020 to the end of the year and urged banks to preserve their cash so that they could absorb pandemic-related losses and lend to their afflicted economies.

The ban was changed to limit dividend payments, and in the summer the ECB said it would happen abolish these limits from September. Dividends come from profits and thus reduce bank capital.

The EU report comes with a broader publication by the Basel Committee showing that global banking systems have also reduced the gap to meet 2028 standards. A group of 95 of the largest banks in the world have a total capital demand of 2028 of almost € 6.1 billion, compared to € 10.7 billion at the end of December 2019.

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