A number of banks have announced their first quasi-equity issues in order to be in a position to face the coronavirus epidemic in the best possible conditions. Among them, Germany's leading bank has issued a bond designed to raise nearly a billion euros. Read more.
Strong capital positions and improved asset quality
In a note published on June 8, the European Banking Authority (EBA) reports that the European banking sector had increased its capital reserves by December 2019, enabling it to tackle the health crisis in "a stronger position" than during the 2008-2009 financial crisis. On average, banks' total capital ratio ("CET1 fully loaded") reached 14.8% in Q4 2019, an increase of around 40 basis points on Q3.
The EBA also notes that European banks have improved their asset quality over the years, and reduced the proportion of bad debts in their customer portfolios. That said, the institution stresses that financial institutions are likely to incur "significant losses" once the Covid-19 crisis is over, and will need to "rebuild their regulatory capital cushions".
Deutsche Bank raises €1.25 billion in subordinated debt
Deutsche Bank has not waited for the recommendations of the European Banking Authority to swell its capital cushion. The bank recently announced the issue of a bond in the Tier 2 capital category.
After 5 years of consecutive losses, Deutsche Bank has had to abandon its objective of achieving a prudential capital adequacy ratio of at least 12.5%. This issue should enable it to increase its total capital ratio and improve its cushion in relation to regulatory requirements. The bank also announced that it would buy back 2 billion euros worth of outstanding bonds from investors.
For its part, Bank of Ireland raised 675 million euros in another category of debt ("AT1").
A good risk assessment is essential
Whether to cope with the coronavirus crisis or to take advantage of the new prudential rules ("CRD 5"), additional subordinated debt requirements in Europe could reach up to 40 billion euros in the coming months, according to estimates.
How banks will be affected by the crisis will depend on how it evolves, each bank's capital start-up levels, and their exposure to the sectors most impacted. The European regulator is therefore calling on these players to "ensure that proper risk assessment continues to be carried out".