According to the Recommendation issued by the European Banking Authority’s (EBA) regarding banks’ recapitalisation, participating institutions were to have a core tier 1 capital ratio less the sovereign capital buffer, expressed in terms of risk-weighted assets, of at least 9%. The sovereign capital buffer is the capital buffer for fair value losses on exposures to member states of the European Economic Area. All German banks participating in the recapitalisation exercise achieved this capital ratio. Most of the institutions had a ratio of over 10%. “The German institutions have thus even overcomplied with the strict targets set by the EBA, which are well above the current legal minimum capital requirements”, explained Sabine Lautenschläger, Deputy President of the Deutsche Bundesbank.

Together with national supervisory authorities, the EBA established the participating institutions’ progress in achieving the required core tier 1 capital ratio as at 30 September 2011. Five German banks were found to require €12.9 billion in recapitalisation. “It is a positive sign that the capital shortfall was largely closed thanks to capital injections”, emphasised Raimund Röseler, head of banking supervision at BaFin. Over 80% (€10.3 billion) of this shortfall was closed by strengthening core tier 1 capital, eg through retained earnings, capital increases or hardening undisclosed deposits or converting undisclosed reserves to disclosed reserves. The institutions also reduced riskier portfolios. These measures improved the average capital ratio of the 12 participating institutions from 9.7% (as at 30 September 2011) by one percentage point to 10.7% (as at 30 June 2012); no institution had a capital ratio of less than 9.5%.

Background information

To strengthen European banks’ capital positions amidst the European sovereign debt crisis, on 26 October 2011 the European heads of state or government resolved to recapitalise banks in the member states of the European Union. This was designed to boost investor confidence in banks’ resilience to further shocks in light of the exceptional market situation.

There were 61 European banks in the recapitalisation exercise; they needed to show a core tier 1 capital ratio of at least 9% (after deducting the sovereign capital buffer) as at 30 June 2012. The sovereign capital buffer was fixed as at 30 September 2011. This stipulation is intended to counter temptations to sell exposures to euro-area countries and thus contain the threat of uncontrolled deleveraging.

Institutions that did not meet these requirements on 30 September 2011 had to present to their national supervisors and the EBA a capital plan detailing the measures they would take to achieve the required capital ratio.

The banks participating in the recapitalisation exercise must continue to comply with the EBA’s higher capital requirements until further notice.

The reader is requested to note that the recapitalisation exercise figures are not comparable with the Basel III monitoring figures owing to differences in regulatory definitions of capital and capital requirements as well as differences in reference points.

Notes:

There were originally 13 German institutions participating in the recapitalisation exercise. Six institutions, including WestLB, were found to be in need of recapitalisation. In the meantime, though, WestLB has been broken up and is therefore no longer affected by the recapitalisation recommendation.