Press release 8 December 2011 – 13/2011 

EBA confirmed calculation of large banks’ capital needs 

The European Banking Authority (EBA) has updated its preliminary assessment of 71 large European banks’ capital needs, on the basis of data as of 30 September 2011. According to EBA’s confirmed calculation, banks’ additional capital needs amount to EUR 114,7 billion. In the calculation, banks’ investments in European sovereign debt instruments are marked to market and banks are expected to have a Core Tier 1 capital ratio of 9%. The banks have also again published all their sovereign exposures.

Finnish banks need not strengthen their capital positions

Of the Finnish banks, the assessment of capital needs was conducted for OP-Pohjola Group, which had participated in the EU stress test. In addition, Nordea Bank Finland from the Nordea Group and Sampo Bank from the Danske Bank Group participated in the assessment through their financial groups.

EBA assesses that no action is needed from OP-Pohjola to strengthen its capital position. The reasons for this are the bank’s high Core Tier 1 capital and its small sovereign exposures. At the end of September 2011, OP-Pohjola Group’s Core Tier 1 capital ratio was 11.1%, ie significantly higher than the minimum threshold of 9% set by EBA. Marking to market of sovereign bonds held at nominal value in the balance sheet at the end of September did not generate capital need either.

Nordea and Danske Bank groups’ capital positions are also assessed as being strong, and no recapitalisation is needed.

Those banks assessed as needing more capital will be required to submit a plan for bolstering their capital position by 20 January 2012 to their national supervisor and to reach the threshold of 9% by 30 June 2012. The plans will also be examined by EBA.

Main features of the calculation methodology were published previously

The main features of the methodologies applied in EBA calculations for sovereign bond valuation and capital positions were published in October. (1) In the calculation, all sovereign bonds in bank balance sheets – including those held at nominal value – are marked to market, and changes in market values are accounted for directly in the banks’ own funds. The definition of Core Tier 1 capital is the same as in the preliminary assessment published in October. Core Tier 1 capital includes the highest quality capital instruments (common equity) and hybrid instruments provided by governments, which are available in full for covering bank losses. A proportion of Core Tier 1 capital may include new hybrid instruments subscribed by private investors, fulfilling EBA criteria, which may be converted to equity capital items, as necessary. The confirmed calculation focuses particular attention on the consistent definition of banks’ Core Tier 1 capital.

Banks with estimated capital shortfalls are required to strengthen their capital positions primarily by increasing their own funds. Own funds can be strengthened mainly by accumulating profits, issuing new capital or converting existing capital instruments into higher-quality assets.

The aim of strengthening banks’ capital positions is to increase confidence in the EU banking sector and promote the availability of banks’ own funding, which is a precondition for banks’ ongoing lending capacity. Supervisors, however, also require that banks should not meet their capital requirements by reducing the supply of credit important for the real economy. ‘Supervisors seek to safeguard the functioning of financial intermediation so that they assess the banks’ plans for strengthening their capital positions from the perspective of lending continuity and, if necessary, seek changes to the plans,’ notes Jukka Vesala, Deputy Director General.

For further information, please contact

Jukka Vesala, Deputy Director General, tel. +358 10 831 5374 (on Friday 9 December, from 8.00 am)

Appendix

 OP-Pohjola Group's assessment 

1) FIN-FSA press release of 27 October 2011: EBA has assessed implications of debt crisis on banks’ capital needs