UPDATE 2-Bank capital surcharge, CoCo blow may force cash calls

Mon Jun 27, 2011 5:31pm BST

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* World's biggest banks face 1-2.5 pct surcharge by end 2018

* Surcharge to be in form of core Tier 1 capital, no CoCos

* Could prompt top European banks to raise over 50 bln euros

* Europe bank shares hit 2011, clarity on capital plans welcomed (Adds comments from Deutsche Bank CEO, bankers)

By Steve Slater and Arno Schuetze

LONDON/FRANKFURT, June 27 (Reuters) - Europe's banks may need to raise over 50 billion euros ($71.6 Billion) after regulators slapped an extra capital surcharge on big lenders to make them safer and forbid the use of debt to pad out the extra cushion.

Bank shares hit a low for the year as lenders 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.

"Capital will become a critical competitive issue. The race to compete for capital has begun," Deutsche Bank AG (DBKGn.DE) Chief Executive Josef Ackermann told a Reuters conference in Frankfurt on Monday.

A capital surcharge of between 1 percent and 2.5 percent for the biggest systemically important banks agreed by global regulators at the weekend was in line with or slightly less than expectations.

Ackermann expected Deutsche Bank to be in the top band and that all the banks facing a surcharge will benefit from lower refinancing costs and be preferred by depositors.

Analysts argue a surcharge means that governments believe the lenders are too important to fail.

"SIFIs (systemically important financial institutions) will in markets be perceived as very secure. We are therefore very happy to belong to the SIFIs," Ackermann said.

But the exclusion of a hybrid form of debt known as contingent capital (CoCos), which converts to equity in times of stress, to comply with the surcharge is 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 towards 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 recapitalising 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 (DBKGn.DE) and UniCredit .

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.

The European bank index closed down 0.3 percent after hitting its lowest level for the year while the broader market ended higher.

The new rules, which need to be agreed by G20 leaders in November, should finalise 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.

COCOS ON HOLD

Some banks that had been considering issuing CoCos, such as Britain's Barclays , could scale back plans given the new guidance, analysts said.

"On the face of it, it doesn't look very good but I don't think it's the end of contingent capital," said Daniel Bell, head of EMEA new product development at Bank of America Merrill Lynch. "A number of national regulators have been talking about higher capital requirements than those set by Basel and it could be that the extra requirements can be fulfilled with contingent capital."

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) (Reporting by Steve Slater in London and Arno Schuetze in Frankfurt; Editing by Louise Heavens)