European Banks May Need More Capital After Basel

By Elisa Martinuzzi and Liam Vaughan

Regulators meeting in Basel this weekend agreed to make as many as 30 of the world’s largest, or systemically important, banks hold as much as 2.5 percentage points more capital than the 7 percent core Tier 1 capital required. They also blocked European banks’ requests to use hybrid capital, such as contingent convertible bonds, to meet the target. The biggest banks will use mostly retained earnings and ordinary shares. Lenders had lobbied against the extra capital requirements, saying they risked stunting the global economic recovery and some had sought to avoid being categorized as systemically important. The decision marks a loss for European banks that are grappling with the region’s debt crisis and had sought to use hybrid capital to meet regulators’ extra requirements. “Europeans were pushing for a mix of common equity and contingent capital and they lost at a global level,” said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., a bank consulting firm. “The capital requirements for the biggest banks have now gone from as low as 2 percent before the crisis to well north of 10 percent. The banks are going to have to constrain activities both by reducing risk and denying credit.”