European banks will be told to move their capital ratios up to 9 per cent by the end of June 2012, according to EU officials. But doubts remain about whether this will be sufficient to convince markets of the solvency of the continent's financial sector.
The European Banking Authority has calculated that European banks need to raise €108bn to lift their capital to this new target ratio after marking down their holdings of eurozone sovereign bonds to their present market values. But the €108bn figure falls well short of some other estimates of the size of the capital needs of the continent's banks. Last month, the International Monetary Fund published research that pointed to a €200bn hole in the balance sheets of European banks. And last week analysts at JPMorgan Cazenove said Europe's lenders would need to raise between €230bn and €243bn to bring their capital ratios up to 9 per cent.
Uncertainty also remains about whether banks will have access to official support from the European bailout fund, the European Financial Stability Facility (EFSF), in order to reach the new ratios. Italy, Spain and Portugal are reported to have resisted signing up to the new agreement on capital ratios without guarantees over the availability of assistance.
But eurozone leaders have yet to decide which banks will have recourse to the EFSF in the event that they fail to raise new capital in the private markets. The bloc's governments do seem to have come to an agreement, however, that banks should cease paying bonuses to staff and dividends to shareholders while they are attempting to raise new capital. Anders Borg, the Swedish Finance Minister, said: "The first solution is withholding dividends and tapping profits." A document was also circulated among the EU leaders at the weekend outlining a possible guarantee scheme to help banks secure access to wholesale funding at a time when many are being shut out of inter-bank lending markets.
Greek bonds remain a sticking point. An analysis from the EU and the IMF on Friday showed that unless Greece's €350bn debt mountain is written down by about 60 per cent, it could balloon in the coming years to €444bn. But the banking sector is still resisting demands for a sizeable write down on the face value of Greek bonds in the market, beyond the 21 per cent they agreed to in July.
Charles Dallara, director of the Institute of International Finance, a lobby group, said: "Discussions are making progress, albeit limited. We remain open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece's market access."
Eurozone finance ministers have appointed Vittorio Grilli, the head of the EU's economic and finance committee, to negotiate with Greece's creditors over the size of the writedown.