* 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
(Adds comments from Deutsche Bank CEO, bankers)
By Steve Slater and Arno Schuetze
LONDON/FRANKFURT, June 27 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
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
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
"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
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
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)