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EBA Recapitalisation Exercise Summary

Core Content

The European Banking Authority (EBA) conducted a recapitalisation exercise with the aim of enhancing the capital positions of EU banks, particularly in the context of a challenging macroeconomic environment and the deepening sovereign debt crisis in Europe. This initiative was part of a broader set of coordinated policy measures agreed by the European Council in October of the previous year. The primary goal was to increase market confidence in the EU banking sector and ensure that banks could withstand further financial shocks.

Main Goals and Outcomes

• Objective: Strengthen banks' capital to meet the $9%$ Core Tier 1 (CT1) ratio by end-June 2012.
• Achievement: The exercise led to a significant increase in the aggregate capital of participating banks.
• Impact on Markets: It helped alleviate concerns about the capital adequacy of EU banks, although it was not the final step in repairing their balance sheets.
• Next Steps: Banks may still require an asset quality review by national supervisory authorities (NSAs) to further improve their capital positions and unlock funding markets.

Addressing Concerns

Q. Won't recapitalisation lead to reduced lending?

• Answer: While some argue that increased capital requirements could negatively affect lending, banks with low capital levels are more likely to be hesitant in lending. Conversely, banks with strong capital positions are more resilient and can continue lending even in difficult times. The recapitalisation exercise is designed to prevent deleveraging pressures that could harm the real economy.

Q. Why isn't this called a "stress test"?

• Answer: The EBA exercise is not a stress test. It involves actual capital figures, not simulated adverse scenarios. It focuses on ensuring a buffer of high-quality capital above minimum regulatory requirements, rather than assessing the impact of hypothetical financial shocks.

Q. What roles did the EBA and NSAs play?

• EBA's Role: Coordinated the exercise and issued a recommendation for NSAs to request capital buffers from banks.
• NSA's Role: Enforced the EBA Recommendation, reviewed capital plans, and ensured compliance with the criteria. They also assessed the impact of risk-weighted asset (RWA) reductions on lending and market stability.

Q. Why is the list of banks different from the initial sample?

• Answer: Initially, 31 banks were short of meeting the $9%$ CT1 target. However, three banks (Österreichische Volksbank AG, Dexia, and WestLB AG Düsseldorf) were undergoing restructuring, and Bankia in Spain was excluded due to its restructuring process. The current report covers 27 banks.

Implementation and Monitoring

• The EBA will monitor banks under special programs or undergoing restructuring, in line with the EFSF guidelines.
• The EBA liaises with the European Commission and other relevant bodies to ensure compliance with the conditions set for recapitalisation.
• The Recommendation remains in force until rescinded, and efforts are underway to transition it to the CRD4-CRR framework.

Asset Sales and Lending Impact

• Asset Sales: The EBA recommended that banks reduce RWAs through asset sales, which resulted in a reduction of €90 bn in RWAs.
• Lending Impact: There is no evidence that the recapitalisation exercise has negatively impacted lending to the real economy. The reduction in RWAs was minimal (0.62%) and focused on a small number of banks. The BIS quarterly review confirmed that the deleveraging process was not excessive or disorderly.

Disclosure

• The current report provides an aggregate view of the banks' capital strengthening efforts and the main drivers behind the changes.
• A detailed bank-by-bank report will be published in September.