EUROPEAN Union leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for an EU summit yesterday.

The reserves must be of the “highest quality,” according to the document. Lenders are expected first to tap private sources to make up any capital shortfall and “should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.” The document doesn’t give an estimate of total capital EU banks must raise to comply with the rule.

Measures for restoring confidence in the EU’s banks are “urgently needed,” the document said. They should include steps to “ensure the medium-term funding of banks, in order to avoid a credit crunch and to safeguard the flow of credit to the real economy.”

European leaders met in Brussels last night to hammer out an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain. The summit was part of an attempt to solve the two-year-old sovereign debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the euro.

Banks’ reserves should be measured after “accounting for market valuation of sovereign debt exposures” as of September 30, the document said.

“It’s very thin and clearly there are a lot of details still to be worked on,” said Simon Maughan, head of sales at MF Global Holdings Ltd in London. “If they don’t come out with a figure on how much capital the banks will need there is going to be disappointment. Arguably the bigger questions revolve around the size of the Greek debt writedown and how they leverage up the EFSF.”

To help European lenders shoulder sovereign losses, banks may be required to raise about 100 billion euros (US$139 billion) in capital by mid-2012, two people briefed on the matter said earlier this week. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece, they said.
 

Source:cnbusinessnews