Banks create new rules to show they are already “well-capitalised”; Magic spreads at lightning speed

Mish's Global Economic Analysis,

9 November, 2011

Regulators have said European banks need to come up with additional capital. The amounts vary from 8 to 413 billion Euros.

Anything less than 200 billion Euros (the IMF's proposed number) is preposterous. Given the rout in Italian bonds today and the gloomy outlook for Spain and Portugal, even 400 billion Euros is far too low.

One Trillion Euros would not be surprising.

The number that Merkel and Sarkozy hammered out with banks is a lousy 106 billion Euros. However, more stories are out today showing the intent of banks is to raise 0 billion in additional capital (because they don't need to!)

For example, Bloomberg reports Financial Alchemy Foils Capital Rules as Banks Redefine Risk

Banks in Europe are undercutting regulators' demands that they boost capital by declaring assets they hold less risky today than they were yesterday.

Banco Santander SA, Spain's largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Regulators in Europe, seeking to stem the region's sovereign-debt crisis, ordered banks last month to increase core capital to 9 percent of risk-weighted assets by the end of June. Lenders, facing a 106 billion-euro shortfall, are reluctant to plug the gap by cutting dividends or bonuses and are struggling to sell assets or raise cash in rights offerings. Politicians are trying to stop banks from the alternative, cutting back lending, because it could trigger a recession.

“By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper,” said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development's financial and enterprise affairs division in Paris. “That risks making core capital ratios useless.”

Commerzbank, Lloyds

Spanish banks aren't alone in using the practice. Unione di Banche Italiane SCPA, Italy's fourth-biggest bank, said it will change its risk-weighting model instead of turning to investors for the 1.5 billion euros regulators say it needs. Commerzbank AG, Germany's second-biggest lender, said it will do the same. Lloyds Banking Group Plc, Britain's biggest mortgage lender, and HSBC Holdings Plc, Europe's largest bank, both said they cut risk-weighted assets by changing the model.

The IMF recapitalization need is 200 billion Euros, a figure I think is exceptionally low because it ignores writedowns on Portuguese, Spanish, and Irish debt (and of course Italian debt as well). It also presumes Greek losses will be pegged at 50% when losses are likely to be in the 70-90% range.

Nonetheless, the agreement worked out by Merkel reduced that 200 billion euro figure down to 106 billion.

I talked about reluctance of banks to raise needed capital on October 31, in Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help

The answer to the question "How Does Europe Recapitalize Banks Without Raising any Capital?" should now be perfectly clear ...

Oh Ho Ho Its Magic!

Magic Spreads at Lightning Speed

What one bank does, they all do.

The Bloomberg article clearly shows Magic has Spread.