Eurozone: How can 200 banks find €400 billion?

OECD's Headquarters, in Château de la Muette, Paris-France (OECD photo library)

OECD’s Headquarters, in Château de la Muette, Paris-France (OECD photo library)

The Organisation for Economic Cooperation and Development (OECD) considers that Eurozone banks need to strengthen their capital accounts by at least €400 billion in order to reach a viable capital to assets coverage ratio of 5%.

The good news from OECD however is that its economist estimate that the single money EU zone seems to have reached towards the end of 2012 the bottom of its U-shaped curve. Consequently 2013 should be a better year than 2012. Let’s start with the banks.

The banks

In detail, according to a report based on data for 200 Eurozone “systemic” banks, the Organisation “assesses the additional capital required for each individual bank to reach a 5% leverage ratio (capital to assets) and then adds up capital needs for currently under-capitalised banks based on this yardstick, to obtain national and area-wide estimates of additional capital needs…The estimated increase in bank capital to reach the 5% leverage ratio in Greece for example is likely to decline substantially following the end-November decision of the Eurogroup to disburse the European Financial Stability Mechanism (EFSF) loan which includes 23.8 billion euros earmarked for bank recapitalisation”.

Obviously this expected capital injection to Greek banks from the EFSF some-time during the first semester of the New Year, will decrease by an equal amount the overall capital needs. By the same token this OECD overall estimate for Eurozone banks capital needs doesn’t include any prediction for future losses.

Then given all that the Organisation says: “If the euro area’s largest banks were to move to a 5% standard, the current capital shortage is estimated at around €400bn (4¼ per cent of euro area GDP)”. Obviously the current capital to assets ratio for those 200 banks falls behind the 5% benchmark by this amount.

It should be noted that a 5% leverage ratio (capital to assets) does not currently form part of the recently reshaped Basel III framework, which expresses capital requirements in terms of risk-weighted assets. A 3% leverage ratio based on total assets has been proposed in that framework as a backstop from 2018 onwards. This means that currently the 200 largest Eurozone banks’ capital to assets ratio is well below 3% according to Basel III definitions.


Judged by a macroeconomic point of view this needed capital increase in 200 banks by an amount equal to 4.5% of the Gross Domestic Product, is not at all much. A betterment of the general economic climate in Eurozone this year will have for sure an even stronger positive effect on financial markets. For example the Athens stock market is now nearing the 1000 points benchmark of its general index, having gained 58.03% during the past six months. Of course nobody expects a betterment of the economic climate in the entire Eurozone to have an equally astonish impact on stock prices as in Athens.

However the predicted by OECD betterment of economic climate in Eurozone, will open the way for new capita issues by the major banks of the zone, a prospect that will greatly facilitate their efforts to increase own capital. No wonder then why a lot o people expect this year to be better than 2012.


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