Monte dei Paschi in talks as ECB gets tough on capital

ROME/FRANKFURT (Reuters) - Executives from Monte dei Paschi di Siena BMPS.MI are making a last-ditch effort to persuade the euro zone's new banking supervisor Daniele Nouy to ease her demands on the Italian lender, sources close to the matter said, as the regulator takes a more robust approach to risk.

People are reflected in the window of a Monte Dei Paschi Di Siena bank in Rome January 29, 2013. REUTERS/Max Rossi

Nouy has proposed higher minimum capital targets for some of the 120 large banks she supervises, including Monte dei Paschi, using data gleaned from the European Central Bank’s (ECB) review of their balance sheets in October.

Most banks have until Friday to respond to Nouy’s recommendations, set to be discussed by the supervisor’s board on Jan. 22 and passed to the ECB for its sign-off by Feb. 4.

Monte dei Paschi remains a key focus for the regulator having emerged as the weakest bank in the sector health check, where Italian lenders as a whole fared worse than those in other countries. Several have been told to meet higher capital requirements than rivals in reflection of the economic problems in their home market.

Sources said Monte dei Paschi Chairman Alessandro Profumo and CEO Fabrizio Viola met Nouy on Thursday hoping to persuade her to lower capital demands for the Tuscan lender if it books around 3 billion euros (2.31 billion pounds) in additional writedowns for bad loans in the fourth quarter of 2014.

This would in effect be in response to an ECB demand that if Monte dei Paschi doesn’t write down those loans, it has to have sufficient capital set aside to reflect the potential loss.

The Italian bank surprised investors last week when it said the ECB had asked it to raise its core capital ratio to 14.3 percent, from 12.8 percent at the end of September.

The bank already has to raise 2.5 billion euros after failing the ECB’s stress tests last year and the new requirement would force it to take more capital-boosting measures if it does not write down its bad loans.

The ECB has also asked Austria's Volksbanken OTVVp.VI to raise its core capital ratio to 14.63 percent by July. The part-nationalised lender had a ratio of 11.5 percent at the end of September.

European banks are still under pressure to raise capital despite most having passed the ECB’s stress tests last year. Banks in the region are lagging U.S. lenders in implementing global capital rules and there are questions over the quality of some of the capital they rely on.

Spain's Santander SAN.MC raised 7.5 billion euros in capital last week but denied it had been influenced by the ECB.

In most cases, banks already meet the new minimum capital levels required by the ECB.

Most of Spain's banks, for example, had been told to hold a core capital ratio of 8 percent, above a 7 percent global minimum scheduled to be introduced by 2019, while the two main Spanish banks, Santander and BBVA BBVA.MC, have been asked to reach slightly higher ratios of around 9 percent because of their bigger role in the local and regional economies.

Santander and BBVA declined to comment.

Until the ECB took the reins in 2014, annual discussions over banks’ capital were conducted at a national level.

National supervisors were still heavily involved in this year’s process but Frankfurt was in the driving seat and in addition to new minimum capital requirements also took a closer look at for example risk reporting, risk management and business models.

Additional reporting by Steve Slater in London, Andreas Kroener in Frankfurt, George Georgiopoulos in Athens, Jesus Aguado in Madrid, Mike Shieds in Vienna and Carmel Crimmins in Dublin; Editing by Keith Weir and David Holmes