Some euro zone banks face recapitalization challenge

Some banks in the euro region may continue to face challenges to re-capitalization as they seek to meet the Basel Committee on Banking Supervision (BCBS)-suggested changes to boost their capital.

“The global banking industry continues to face significant challenges to clean its balance sheet in order to improve the quality of assets and profitability,’’ according to the Report on Trend and Progress of Banking in India released by the Reserve Bank of India on Monday.

Under the Basel-III framework, banks will need to have Tier-one capital of six per cent of risk bearing assets, compared with four per cent at present. Still, the leeway to meet these conditions by 2019 had eased concerns that banks will have to rush to raise capital quickly.

Banks would not be required to meet the minimum core Tier-1 capital requirement, comprising shares and retained earnings, at 4.5 per cent until 2015, RBI said. An additional 2.5 per cent capital conservation buffer would not be required until 2019, it added.

“In line with the proposal of BCBS for higher capital charge, the banking industry in some regions such as the euro area may witness challenges to recapitalisation, especially as countries in the euro area engage in fiscal consolidation efforts,’’ RBI said.

The global banking system remained vulnerable to further losses and the disruption in funding markets had the potential to choke refinancing channels when sentiments turned adverse, RBI cited Bank for International Settlements as saying.

Emerging economies, including India, remained resilient during the global economic crisis and recovered swiftly as soon as the impact of the crisis waned, it said. Still, the continuing weakness in the global economy posed downside risks through adverse implications on trade and financing channels, it said.