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Six eurozone banks fall short of ECB capital requirements

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Via Financial Times

Six eurozone banks have fallen below the European Central Bank’s capital requirements and been told to take action to fix the shortfalls, which underline the continuing fragility of Europe’s banking sector.

The number of banks falling short of their main capital requirements in the eurozone has increased from only one last year, illustrating how the sector remains under pressure from ultra-low interest rates, inefficient cost structures and fines for past misconduct.

Andrea Enria, chair of the ECB’s supervisory board, said he was “broadly satisfied” with the results of its latest review of bank capital needs. But he flagged up concerns over “the business models, internal governance and operational risks in banks,” adding: “This is where we will sharpen the focus of our supervisory work.”

For the first time, the ECB published the capital requirements for the banks it supervises, except for a handful that refused to give their permission, including the financial services arm of Volkswagen, the German carmaker.

“An assessment of business models showed that most significant institutions’ earnings are below their cost of capital,” the ECB said. “This hampers their capacity to organically generate capital and to issue new equity.”

“Concerned by low profitability, supervisors are increasingly focusing on banks’ future resilience and the sustainability of their business models,” it said, adding that internal governance was also a worry after standards slipped in recent years.

The supervisor, which works closely with national authorities to oversee the largest banks in the eurozone, said that “in a significant number of instances management bodies are not effective and internal controls are weak”.

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The ECB said its capital requirements were unchanged last year, requiring banks to have on average a 2 per cent “pillar two” buffer above their regulatory minimum, plus an extra 1.5 per cent for the non-binding “pillar two guidance”.

However, it said that overall requirements for bank capital levels had increased from 11.5 to 11.7 per cent last year after national regulators increased the “countercyclical buffer” to address overheating in the financial system and raised systemic buffers for the most important institutions.

Non-performing loans at the main eurozone banks continued to fall to €543bn last September — down from over €1tn during the eurozone debt crisis five years ago — representing on average 3.4 per cent of the sector’s loan books.

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