Europe's banks may need to raise tens of billions of euros after regulators slapped an extra capital surcharge on big lenders to make them safer, and told them they could not use contingent capital for the extra cushion.
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Banks in France and Germany may be most in need, adding to fears their capital could be strained by losses on holdings of Greek bonds and loans to the troubled euro zone country.
A surcharge of between 1 percent and 2.5 percent for the biggest banks agreed by global regulators at the weekend was in line with or slightly less than expectations.
But the exclusion of contingent capital (CoCos) to reach the higher target will be a disappointment to many banks and investors, analysts said.
"The quid quo pro of a lower charge (than expected) appears to be the fact that CoCos cannot be used toward the surcharge -- it must be made entirely of equity capital," said Andrew Lim, analyst at Espirito Santo.
Not allowing CoCos will be an unwelcome surprise for those managers and investors who had seen them as the solution to recapitalizing the sector, said Antonio Guglielmi, analyst at Mediobanca.
"The buffer should trigger a final wave of rights issues," Guglielmi said in a note on Monday, estimating a 62 billion euro ($88.8 billion) capital shortfall shared between BNP Paribas , Societe Generale , Credit Agricole , Santander , Credit Suisse , Deutsche Bank and UniCredit .
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To meet the new standards Deutsche Bank needs more than 12 billion euros, HSBC needs $14 billion and Credit Agricole, Credit Suisse and SocGen each have a capital deficit of about 7 billion euros, Lim estimated.
The big French and German banks are already under pressure due to their bigger exposure to Greece than banks elsewhere. Losses there could force some capital raisings, analysts said.
A French banking source said on Sunday the French Treasury had reached a deal with banks to make a voluntary rollover of sovereign debt holdings more palatable.
By 0855 GMT, shares in BNP Paribas, SocGen and Credit Agricole were each down about 0.2 percent. Deutsche Bank, Credit Suisse and HSBC were all up around 0.5 percent. UniCredit recovered from a sell-off on Friday and was up 1.6 percent. The European bank index <.SX7P> was up 0.6 percent.
The new rules, which need to be agreed by G20 leaders in November, should finalize capital requirements after years of wrangling. As a result, it could be a positive step for the industry and give investors greater confidence, several analysts said.
Some banks that had been considering issuing CoCos, such as Britain's Barclays , could scale back plans given the new guidance, analysts said.
The surcharge will add to a 7 percent minimum capital standard and is part of a series of regulatory reforms launched in response to the financial crisis to make the system safer and prevent the need for taxpayer bailouts.
About 30 banks are expected to be subjected to the surcharge. HSBC , JP Morgan and Deutsche Bank are among about eight banks likely to be in the top bracket needing to hold 9.5 percent core Tier 1 capital.
Regulators are due to decide the specific capital levels for banks next month. The surcharge will be based on five elements -- size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.
Simon Hills, director of the British Bankers' Association, said the plan needs to be carefully implemented to avoid damaging economic recovery, and still hopes to convince regulators that capital instruments such as CoCos can be used.
"The dog that has not yet barked is business, as these proposals will increase the cost of borrowing. It's important we get the detail and the timing right so that economic recovery is not impeded," Hills said.
Many of the world's biggest banks hold core Tier 1 capital ratios of 10 percent or more, and therefore meet or exceed the top end of the surcharge band.
Banks have until 2016/2018 to start implementing the rules, although in practice they are expected to have the capital in place by next year or 2013 to reassure investors. ($1 = 0.698 Euros)