U.S. Response to Crisis Is Seen as More Proactive; a $600 Billion Gap?
The U.S. government’s stress tests are fueling concerns that European banks could be falling behind in their efforts to bolster their own finances.
Unlike in the U.S., there has been no major policy initiative to force banks in Europe to increase capital cushions, and governments have intervened only on a piecemeal basis. Meanwhile, as U.S. banks pile in with efforts to raise capital from investors, European banks aren’t taking advantage of a stock rally to do the same.
(…) European banks have raised only about 40% of the $1 trillion they need to cover losses since the beginning of the financial crisis and maintain healthy capital levels, according to the latest estimates from the International Monetary Fund.
By contrast, U.S. banks have raised or announced plans to raise about two-thirds of the $666 billion the IMF believes they need.
The UK stress tests of its banks were closed to outsiders. Other countries will have their stress tests completed by September.
European banks now face potential losses from risk-taking that U.S. banks largely avoided, such as investments in Eastern Europe, which is suffering from a severe recession. Banks in Europe also are more vulnerable to skittish wholesale money markets because of their higher ratios of loans to deposits.
(…)some 80% of lending to companies in Europe is through banks, compared with only one-fifth in the U.S. If replenishing capital levels causes European banks to pull back on lending, it could slow economic recovery.
(…) Analysts at investment firm Keefe, Bruyette & Woods Ltd. who attempted to replicate the U.S. stress tests for European banks came up with what they called a "broadly positive" result. Six banks with widely traded shares, including Commerzbank AG and Danske Bank AS, would need to raise a total of only about €8 billion ($10.9 billion) in capital to meet the 4% equity Tier 1 capital ratio used in the U.S. tests.
In reality, the European banks probably would want to raise a lot more capital — as much as €60 billion — to maintain investor and customer confidence under a bad scenario similar to one used by the U.S. government, said Andrew Stimpson, a KBW analyst.(…)