The European Banking Authority (EBA) issued guidance this week on the substantial capital needs across the European commercial banking sector. The EBA estimates up to Eur 470 billion in further so-called loss absorbing capital is required following its recent and first quantitative impact study. The study sought to estimate needs for the EU MREL, or minimum requirement for eligible liabilities. These are indeed estimated requirements given the need to make both scope and calibration assumptions at the bank level. This metric is essentially the same capital requirement set by local bank regulators and has been driven by work done by global policy makers such as the FSB who called for total loss absorbing capital for the banking industry.
The amount, an substantial sum, is a target for the industry to raise over the following three years. As part of the move towards bailing-in creditors rather than bail outs, there is a significant movement in Europe to amend local laws to enlargen the eligible pool of securities to be bailedin, including senior bonds, for bail in as described in my earlier posts. The EBA memo can be found here: http://www.eba.europa.eu/-/eba-provides-updates-on-npls-in-eu-banking-sector.
As long as material capital funding requirements remain, I expect to see continued paring of bank balance sheets, asset de-risking, narrow setting of risk appetite outside of core banking businesses, and over time a growing need to allocate and monitor capital intensive businesses. It also underscores the particular challenges being faced in selective EU markets such as Italy which is coming to terms with bail-in versus bail-out dynamics when facing NPLs and distressed assets.
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