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EBA Bank Recapitalisation Plan Summary

Core Content

The European Banking Authority (EBA) announced the results of a bank recapitalisation plan in response to the deepening sovereign debt crisis. The plan aims to strengthen the capital positions of European banks to ensure their resilience against financial shocks and restore market confidence.

Main Objectives

• Address the impact of the sovereign debt crisis on bank funding and lending
• Reinforce banks' capital buffers to meet the minimum Core Tier 1 (CT1) capital ratio of 9%
• Implement a temporary and exceptional capital buffer to cover sovereign debt exposures

Key Measures

• Sovereign Capital Buffer: A one-off measure designed to reflect market prices as of September 30, 2011.
• CT1 Ratio Target: Banks must achieve a CT1 ratio of 9%.
• Basel 2.5 (CRD3) Rules: Applied for Risk-Weighted Assets (RWAs), contributing to the capital shortfall.
• Capital Buffers: Not revised based on bond sales, as the buffer is meant to reflect current market conditions.

Key Dates

• January 2012: Banks must submit plans to achieve the target capital levels to National Supervisory Authorities (NSAs).
• June 2012: Banks are required to meet the buffer requirement.

Capital Shortfall

• The overall capital shortfall is EUR 114.7 bln, with EUR 30 bln specifically attributed to Greek banks.
• The shortfall is concentrated in banks from GIIPS countries (Greece, Ireland, Italy, Portugal, Spain), Germany, France, and Belgium.

Dynamics of Sovereign Buffer

• There are no major changes in the sovereign buffer between preliminary and final data collection.
• The sovereign buffer does not contribute to the capital shortfall if banks already have free capital above 9% CT1R.

Drivers of Increased Capital Needs

The capital requirement is driven by three equal factors:

1. Target CT1 ratio of 9%
2. Application of Basel 2.5 (CRD3) rules for RWAs
3. Sovereign buffer

• Over 60% of the sovereign buffer relates to assets in the Available for Sale (AFS) portfolio, already marked-to-market.
• The remaining 40% is attributed to marking-to-market EEA sovereigns in the Held-to-Maturity (HTM) and Loans and Receivables (L&R) portfolios.

Net Direct Sovereign Exposures (as of 30 Sept 2011)

• Total net direct sovereign exposures to EEA countries: EUR 1.574 bln
• Sovereign exposure to GILPS countries (Greece, Ireland, Italy, Portugal, Spain): EUR 511 bln
• The sovereign portfolio is mainly composed of:
  • Hold-to-Maturity (HTM): 43%
  • Available for Sale (AFS): 41%
  • Loans and Receivables (L&R): 16%

Indirect Sovereign Exposures: CDS

• Total notional sold: EUR 347 bln (GIIPS: EUR 177 bln)
• Total notional bought: EUR 328 bln (GIIPS: EUR 169 bln)
• Protection against GIIPS: About 90% is sold by non-GIIPS banks.
• Positions are on average balanced, but concentrated.

Conclusion

The recapitalisation plan is a critical response to the sovereign debt crisis, aiming to reinforce the capital positions of European banks and ensure their stability. The EBA has provided clear guidance on the implementation of capital buffers and the timeline for meeting the targets, while highlighting the significant exposure to GIIPS countries and the importance of market-based valuations in assessing capital needs.