RPT-Could bank recapitalisation kill the patient?
LONDON, Oct 14 (IFR) - Can attempts to stop the euro zone
debt crisis spiralling further out of control by boosting banks’
capital be achieved without killing either the economy or
private investors’ appetite for financial institutions?Now the European Commission has thrown its weight behind the
IMF’s push in September for a eurozone banking recapitalisation,
forced recaps of European lenders appear inevitable. The
question now becomes, how should they be done?Even before EC president Jose Manuel Barroso’s statement to
the EU parliament on Thursday proposing a recapitalization,
senior FIG bankers were arguing against pure equity injections
that dilute existing shareholders.”Banks will do everything to avoid taking government money:
sell assets, reduce RWA, stop lending. Plus any bank would loath
to raise equity at the current levels,” said one banker.It might not be that simple. Quite simply the world believes
a Greek default is coming and it might be followed by others.According to Goldman Sachs research, 50 of 91 European banks
could fail a revised regulatory stress test with a combined
short-fall of EUR139bn, and if the core Tier 1 capital ratio is
set at 9% instead of 7% the gap could be EUR300bn.When the US authorities stemmed American banks’ downward
spiral in 2008, the recapitalization was complemented by various
liquidity provisions and asset price stabilization measures but
ultimately by a regulatory threat that the state would inject
capital if the private sector would not.The majority of bankers who spoke to IFR believe some sort
of repeat of the US experience is possible. A European version
of TARP would entail banks being provided with capital via
preferred shares and warrants.Prefs would not be Basel 3 compliant but that need not be a
bad thing as they would then clearly be seen as only temporary.Later on, the injection could be followed by conversion into
common stock or private equity raises.This type of operation is clearly going to be an expensive
exercise. Barroso said banks should first use private sources of
capital, and threw a wild card into the mix by saying this
should potentially include restructuring and conversion of debt
to equity instruments.Bondholders have warned that coercive liability management
similar to what happened in Ireland, where Tier 1 investors
suffered losses of up to 90% on their bonds, would be
dangerous.Barroso has said that, if necessary, national governments
should provide support, and should this not be available, then
recapitalisation should be funded via a loan from the EFSF.Paul Achleitner, Allianz board member, is pushing for a
transformation of the European Financial Stability Facility into
a sovereign debt insurer.This would dramatically increase the fire power of the
Triple A EUR440bn fund without requiring another painful round
of EU government approvals.One banker likened this to an asset protection scheme (APS)
of the type used to protect Royal Bank of Scotland after an
initial state injection of capital had proved insufficient.”The capital benefit from the APS because of the reduction
of risk weighting is immense,” he said.Furthermore, structured carefully, under Eurostat rules the
APS would appear on states’ balance sheets only when actual
losses occur.The APS concept is also behind various bad-bank plans used
for ABN, LBBW, BayernLB, KBC and UBS, although Eurostat’s
accounting treatment is different in that circumstance because
assets are transferred in a bad bank.The Allianz idea would only guarantee new issuance. Whether
existing sovereign debt would benefit or be shunned because
investors consider it subordinated is an open question but
hitherto APS schemes have only supported existing portfolios.There are big questions whether it’s possible to
recapitalize banks via traditional mechanisms without
destabilizing markets further as this would imply that sovereign
debt does not possess the risk-free status it had previously
been assumed to hold.And there is no certainty on timing, size or the source of
losses due to sovereign exposure. Ideally this uncertainty needs
to be eliminated and attempting to calculate the quantum risks
sending the wrong signals about the size of the problem and the
ways to reduce it.Most importantly, there is little political appetite for
further injections of capital that cost the taxpayer money, but
this needs to be weighed against the requirement for demand from
equity and fixed income investors.”There needs to be a limit to excessive dilution, and
second, bondholders cannot feel they are being overly hit,” said
one banker.Given this, another option that some have considered is the
issuance of a form of contingent capital which might convert
into capital at times of stress, although pre-emption rights
might make it difficult to execute.
