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April 25, 2014

EU banks urged to grasp chance to raise capital

“European banks have been urged to take advantage of favourable market conditions to raise capital before tougher rules on tapping public backstops come into force.”

“Vítor Constâncio, the European Central Bank ’s vice-president, said the current strong appetite among investors to plough money into euro area banks was “reassuring”, amid a series of fundraisings by euro area lenders.”

However, he urged banks and investors to carefully study new legislation governing the resolution and bail-in powers that will kick in when banks get into serious trouble.

He pointed out that from next year, banks may have to be put into resolution measures if they fail to meet the baseline scenario set out in a stress test and are forced to seek public money.

Addressing a conference in Madrid, he said: “Very likely, if such bank is formally put into resolution it may suffer irreparable damage in the market place, further complicating its situation and generating spillover effects on other banks.”

However, he also said that an exemption to the new resolution rules could apply if necessary to avoid a “serious disturbance” in a member state’s economy and preserve financial stability.

“We certainly hope that in the context of such a wide-ranging undertaking to assess the robustness and resilience of European banks, there will be reasonable financial stability aspects to justify, in several cases, such exemption,” he added.

“Banks have been scrambling to pre-empt the ECB’s asset quality review and stress test by strengthening their finances now, rather than waiting for their marching orders once the regulatory health check is over.”

Euro area banks have already raised €30bn since the ECB announced its Comprehensive Assessment last summer, according to calculations from Morgan Stanley.

Mr Constâncio expressed optimism that the current favourable financial markets conditions will last for much of the rest of the year, allowing banks to continue to tap investors where necessary by raising money in the private markets.

“Hopefully, this situation will remain unchanged until November so that banks that need to reinforce their capital buffers will be able to raise money in the private market and the whole question of public backstops can move to the background,” he said.”

“The comments come as banks await publication next week of the parameters of stress tests that will be imposed on banks across Europe.”

“The announcement by regulators including the European Banking Authority will be a milestone as investors struggle to gauge the possible black holes in banks’ balance sheets.”

“Leading officials, including Mario Draghi , ECB president, and Danièle Nouy, the euro area’s chief banking regulator, have warned that some banks will have to fail the health checks.”

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Read full Financial Times article here.

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