Regulation  

Eurozone banks must cut £2.75trn more assets: RBS

Eurozone banks are still far from recovery and need to cut a further €3.2trn (£2.75trn) more assets over the next three to five years, despite shrinking by €2.9trn (£2.5trn) since May 2012, a new report has revealed.

A Royal Bank of Scotland report, titled The long way to deleveraging: We are only halfway there, revealed eurozone banks are still too large at €32trn (£27.5trn), as this is more than triple the size of the eurozone economy.

They need to be leaner and raise more capital, the report said, estimating they will have to cut €3.2trn (£2.75trn) over the next few years.

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Large banks will have to cut €661bn (£568bn) of assets and generate €47bn (£40.4bn) of capital to comply with upcoming regulatory requirements, the report states.

Small and mid-sized banks with less access to capital markets will deliver mostly by reducing assets, by €2.6tn (£2.24trn), RBS noted.

In 2011, RBS forecasted eurozone banks would shed €5.1tn (£4.4trn) of assets but they have only cut €2.9trn (£2.5trn) so far, mostly through run-off rather than sales of assets.

The report said: “We are only halfway to sustainable levels, in our view, as banks prepare for new regulation on capital and leverage.”

Deutsche Bank, Credit Agricole and Barclays need the most capital as these banks show the greatest shortfalls in RBS’s analysis.

RBS said Deutsche Bank recently stated it seeks to cut assets by 20 per cent over the next two-and-a-half years, while Barclays plans to reduce leverage exposure by £65bn to £80bn by next June.

Societe Generale and Commerzbank also have moderate shortfalls.

Most other banks will be able to strengthen their capital gradually through earnings, the report said.

However, mid-tier banks in Italy and Spain continue to appear as the least capitalised. With the EC bail-in regime kicking in next year, RBS expects to see more burden-sharing actions on sub debt.

The report said: “Stay long bank debt on positive policy actions, but it’s still early for a recovery. Deleveraging is positive for credit and ECB/EIB actions will help to stimulate non-bank lending through bonds and securitisations.

“Yet, eurozone banks are far from a recovery, unlike their US counterparts: the value in Europe is still in bonds rather than stocks. We are long senior bank bonds across Europe and sub in core and semi-core.”