February 9, 2012 / 7:02 PM / 6 years ago

EU bank watchdog says recap plans won't hit economy

LONDON (Reuters) - Most of the plans from 31 banks in the European Union to plug a 115 billion euro (96 billion pounds) capital hole include measures like retaining earnings that avoid harming the real economy, the bloc’s banking watchdog said on Thursday.

The European Banking Authority also said that the next pan-EU stress-test of banks won’t take place until 2013.

Banks, however, are likely to be disappointed that, for now, the EBA won’t remove or scale back a temporary buffer they must hold to guard against euro zone sovereign debt losses.

The EBA said the recapitalisation plans exceed what was required of the banks by a quarter, giving a buffer should some capital actions not materialise.

The plans will come as a relief to finance ministers and regulators who feared that banks would be tempted to cut loans to companies in an already struggling economy to lift capital ratios up to the 9 percent required by banks by the end of June.

The EBA said most of the measures proposed in the plans will raise capital, retain earnings and convert hybrid debt into common equity.

“The measures are not viewed as having a negative impact on lending into the real economy,” the EBA said at the end of a two-day meeting in London to assess the plans.

“Although EU banks are going through a process of restructuring their business models, and therefore reducing their lending, such measures are not factored into banks’ recapitalisation plans.”

It added: “The Board of Supervisors also agreed that, in the context of the ongoing recapitalisation exercise, the EBA would undertake its next EU-wide stress test in 2013.”

National regulators and the EBA will now carry out an in-depth analysis of the plans.

“The analysis will assess the credibility of measures such as forecasts of retained earnings, the effectiveness of the process for the approval of new advanced models and the reliability of assumptions underlying the planned disposal of assets and their geographical impact,” the EBA said.

It added: “During this process, capital plans may be challenged and in some cases revised. If earning forecasts, or other assumptions, look optimistic, back-up plans will be requested. Capital relief for new models will be subject to scrutiny by consolidating supervisors and colleges.”

Its assessment of the recapitalisation excluded the 30 billion euros needed by Greece’s banks and the needs of Volksbank, Dexia and WestLB, who are all being restructured with help from the state.

As a result, the EBA said its review covered 78 billion euros of the 115 billion capital shortfall previously identified.

Final approval for all plans is due in March with the EBA then monitoring implementation up to the June deadline.

Reporting by Huw Jones and Steve Slater; Editing by Jon Loades-Carter

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