UPDATE 3-EU watchdog warns banks still face major challenges

Wed Jul 11, 2012 12:36pm EDT

* Banks successfully meet new capital requirements

* 7 banks required government help

* Banks hiked capital by combined $116 bln

* Banks needed to fill 76 bln euro shortfall

* "This is not a silver bullet" -Enria

By Matt Scuffham and Steve Slater

LONDON, July 11 (Reuters) - The European Banking Authority said there remained significant challenges ahead for Europe's banks having just cleared the first hurdle to bolster their capital buffers.

The EBA said that 27 banks had hiked their combined capital by 94.4 billion euros ($115.7 billion) to meet the expectations of the watchdog and fill a 76 billion euro shortfall to help make them strong enough to withstand the euro zone debt crisis.

Europe's banking watchdog had given banks until the end of June to hold core Tier 1 capital of 9 percent of risk weighted assets as part of efforts to restore confidence in the sector.

EBA Chairman Andrea Enria said the recapitalisation had been a "necessary and important step" but cautioned that banks had a long way to go to recover from the financial crisis and comply with new global regulations.

"A lot still needs to be done," Enria told Reuters in an interview on Wednesday. "I'm very much aware this is not a silver bullet to resolve the difficult situation of the European banks. It's a very complex crisis we are in and we don't want to sound too upbeat on this"

The EBA's recapitalisation plan was part of a three-pronged approach that also deals with sovereign debt exposures and improving access to funding.

"We have always said this is one component of a more comprehensive package of measures that needs to be put in place to bring stability to the European banking sector," he added.

Those measures include attempts by the EU to break the mutual dependency between weak banks and over indebted sovereigns.

"We know very well that having strengthened the capital position of the banks this does not solve the problem of the interconnection of the banks and the sovereigns and does not re-open access to funding markets," Enria said.

Euro zone leaders have also agreed to create a single banking supervisor for the area's banks, seen by some observers as the first step towards a European banking union.

"The banking union in the euro area is an important component of the overall strategy to restore confidence in the European financial sector," Enria said.

STRESS TESTS

The EBA conducted a stress test of banks in July 2011, following up with a review later in the year when additional requirements were imposed on some banks.

That test had a pass mark of 5 percent core tier 1 capital, the main benchmark of a bank's health. As the euro zone debt crisis worsened last year, a recapitalisation exercise was later carried out with a tougher threshold set for lenders.

Enria said banks had come up with around 230 billion euros of capital strengthening in the past 18 months, including capital raised for last year's stress test, the latest recapitalisation and additional packages being deployed in Greece and Spain.

Regulators and governments are concerned that aggressive deleveraging by banks is squeezing credit and hurting economic growth. Bank of England Policymaker Adam Posen said on Wednesday British banks were being excessively cautious in their lending practices.

The EBA said banks had complied with its latest recommendation without having to reduce lending to households and companies or resort to a fire sales of assets.

Banks had achieved 76 percent of the total capitalisation through measures such as retaining more of their earnings, issuing new equity and managing liabilities, the EBA said. Deleveraging measures had accounted for a reduction in banks' risk-weighted assets of only 0.6 percent compared with September last year, it said.

Seven banks needed government help to meet the new threshold. Those banks were Portugal's Caixa Geral de Depositos, Banco Comercial Portugues and Banco BPI, Slovenia's Nova Ljubljanska Banka, Italy's Banca Monte dei Paschi di Siena and Bank of Cyprus and Cyprus Popular.

The EBA did not include Spain's Bankia in the review following its bailout by the Spanish government. It had said in February that Dexia, WestLB and Austria's Volksbank would be excluded because they were in the midst of restructuring. Greece's banks, which are receiving capital as part of a bailout, were also excluded.

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