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November 09, 2011 at 08:00 AM
European regulators have told banks that they must boost their capital reserves as eurozone debt worries threaten not just individual countries but the joint currency as well. A number of banks have responded not by cutting dividends or bringing in more cash, but by reclassifying the risk on their existing debt holdings—loans, derivatives and mortgages. While the tactic is legal, it is far from reassuring to a number of officials, analysts and economists, who say it defeats the purpose of the higher reserve requirements.
In a Bloomberg story, Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development’s financial and enterprise affairs division in Paris, called the ratio of core capital “meaningless” and said, “By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the gamekeeper. That risks making core capital ratios useless.”
In October, banks were told by regulators that they must boost core capital to 9% of risk-weighted assets by June of 2012. While options available to do this include cutting bonuses and dividends, raising money from rights offerings or selling off assets, as well as putting a hold on lending operations to retain cash—an action politicians are opposing lest the crisis worsen—a number of banks are changing their risk models.
Spain’s two largest lenders, Banco Santander and Banco Bilbao Vizcaya Argentaria; Italy’s fourth-biggest bank, Unione di Banche Italiane; Commerzbank, Germany’s second-biggest lender; Lloyds Banking Group, Britain’s biggest mortgage lender; and Europe’s largest bank, HSBC Holdings, are among the banks revising their risk-weighted asset model to varying degrees, so that they can redefine such assets in order to reduce the amount of cash they must raise by other means.
