Banks told to build cash funds as buffer against future crisis
Published 21/07/2011 | 05:00
European banks will have to boost their cash reserves by €460bn between now and 2019 to meet stringent new EU-wide requirements.
The measures, unveiled yesterday by the European Commission, are designed to line banks' balance sheets with high-quality capital that can be invoked in the event of a future crisis, saving taxpayers coming to the rescue.
If agreed by governments and MEPs they will more than double, from 2pc to 4.5pc, the amount of common equity -- ordinary shares -- banks are required to hold. The overall capital requirement will then be 10.5pc.
This includes a 2.5pc cushion designed to offset potential losses, but the EU also wants banks to amass a "countercyclical" buffer of up to 2.5pc of risk-adjusted assets, to be built up when profits are high and drawn down during potential crises.
They will apply gradually from 2013.
AIB, Bank of Ireland, EBS and Irish Life & Permanent will boast capital levels of between 16pc and 32pc once they are fully recapitalised in line with the March stress test results.
The EU will also phase in limits on borrowing, or leverage, and mandatory liquidity ratios from 2015.
Irish banks have to reduce their loan-to-deposit ratios to 122.5pc by December 2013 under the EU-IMF bailout. The average ratio for the four banks was 180pc at the end of 2010.
Lenders that fail to meet the new EU thresholds could face sanctions of up to 10pc of annual turnover and may be asked to suspend or slash dividend and bonus payments to make up the shortfall.
The commission's banking chief, Michel Barnier, said that once implemented the rules would cut the risk of future crises by 70pc and restore stability to financial markets.
"Difficulty in a European bank has consequences throughout the sector," he told reporters in Brussels. "There is no reason for the core prudential rules to be different in Madrid, Warsaw, London, Paris, Rome and Berlin."
The changes bring into law standards outlined by the international Basel committee on banking supervision last year.
The EU wants all 8,300 banks across the bloc to abide by the same rules, although the central bank will have discretion to impose tougher limits on risky banks, particularly those with high exposure to the property market.
In the Irish case, banks displayed conflicts of interest, "offering products freely without any particular constraint", Mr Barnier said.
A spokesperson for the Department of Finance said the proposals would have "significant implications for the capital structure of EU banks" and that negotiators would have to ensure that the final outcome took account of "EU banking sector specificities".