EU Says Bank Losses Could Reach 400 Billion Euros

By Mark Deen and Svenja O’Donnell

Oct. 2 (Bloomberg) -- A stress test of the European Union’s biggest banks showed they could withstand an even deeper recession, though with almost 400 billion euros ($581 billion) in losses, a report to EU finance chiefs showed.

Under current EU economic forecasts for 2009 and 2010, the largest banks in the region would maintain an average Tier 1 capital ratio “well above” 9 percent, the officials said yesterday in a statement after meeting in Gothenburg, Sweden. A “more adverse” scenario would boost losses and cut the average ratio to about 8 percent.

The five-month study was ordered by ministers after a similar one in the U.S. European Central Bank President Jean- Claude Trichet emphasized that the potential losses for the region’s 22 largest banks represents an “adverse” scenario and not a base-line case.

“All systemic institutions showed that they were very resilient,” Spanish Economy Minister Elena Salgado told reporters today. “That’s a good result.”

No bank among the 22 included in the test would see its Tier 1 capital ratio fall below 6 percent as a result of the adverse scenario, according to the statement. The minimum Tier 1 capital requirement for banks under the Basel accords is 4 percent.

Earnings Forecasts

“This resilience of the banking system reflects the recent increase in earnings forecasts and, to a large extent, the important support currently provided by the public sector to the banking institutions,” the officials said, referring to capital injections and asset guarantees.

European financial institutions have posted $498 billion in losses since the onset of the credit crunch in mid-2007, less than half the $1.08 trillion in losses reported in the U.S., according to Bloomberg data.

U.S. regulators found earlier this year that 10 financial companies led by Bank of America Corp. needed to raise a total of $74.6 billion of capital, in results made public on May 8. Releasing the findings helped calm investors, U.S. Comptroller of the Currency John Dugan, who oversees national banks, said at the time. The EU didn’t publish the names of the banks it studied.

Trichet and other officials said the methodology used in the report, prepared by the Committee of European Banking Supervisors, differed from that used by U.S. authorities and the International Monetary Fund. The divergence in part reflects different accounting standards, they said.

Global Writedowns

The Washington-based IMF this week cut its projection for global writedowns on loans and investments by 15 percent to $3.4 trillion, citing improvements in credit markets and initial signs of economic growth. The tally was based on a new methodology after criticism of an April estimate of about $4 trillion. Losses on bad assets are projected to increase from July 2009 through next year by $470 billion in the euro area, according to the report.

Bank capital reserves will still have to improve to strengthen the financial system, according to Bundesbank President Axel Weber.

“In the future, not only the quality but also the level of banks’ capital has to increase in order to make them more resilient,” Weber said in Gothenburg.

Stress Testing

The finance chiefs intend to make stress testing routine and possibly annual. “We would like such tests to be published regularly,” French Finance Minister Christine Lagarde told journalists.

The Brussels-based Bruegel research group urged the ministers to set a deadline for member states to withdraw credit guarantees for banks to spur them to raise new capital and write off bad loans.

“Bank recapitalization and restructuring should be completed in all EU countries as a matter of urgency,” the institute said in a report on post-crisis exit strategies. To encourage this, governments should “agree on a timetable and firm deadlines for termination of government guarantees.”

Ministers also discussed EU proposals to centralize financial regulation through the establishment of European banking, systemic and risk monitoring agencies. Swedish Finance Minister Anders Borg said yesterday that finance chiefs hoped to reach a political agreement on supervision by the end of the year.

The Group of 20, which includes the EU’s Britain, France, Germany and Italy, committed last week to conducting “robust, transparent stress tests as needed” and called on banks to retain a greater portion of current profits to bolster capital.

----With assistance from Simone Meier, Jana Randow, Niklas Magnusson, Jeffrey Donovan and Agnes Lovasz in Gothenburg. Editors: Jones Hayden, Kim McLaughlin

To contact the reporters on this story: Mark Deen in Gothenburg at markdeen@bloomberg.net; Svenja O’Donnell in Gothenburg at sodonnell@bloomberg.net.