* European Banking Authority releases data on top EU banks
* Exposure of banks to local sovereign debt grows
* Average core capital ratio is 11.7 pct at end-June
* Banks have shed 817 bln euros of risk-weighted assets
By Huw Jones
LONDON, Dec 16 European banks have filled their
balance sheets with national debt since 2011, bringing them easy
profits but reinforcing a "doom loop" linking weak banks to
governments with shaky finances.
The euro zone debt crisis showed banks can suffer big losses
from holdings of their own countries' bonds, which in turn can
torpedo state finances if banks need to be bailed out.
Policymakers have been trying to loosen the mutual exposure
of banks and governments that ensured they dragged one another
down during the crisis.
But the European Banking Authority (EBA), the European
Union's banking watchdog, said on Monday the share of bonds
issued by sovereigns under stress held by their domestic banks
had "increased markedly" between December 2010 and June 2013.
The net exposure of the leading banks to sovereign debt fell
9 percent in 2011 but then rose 9.3 percent to 1.59 trillion
euros ($2.19 trillion) in the 18 months to June this year, data
released by the EBA showed.
The data confirms what many already suspected - that banks,
particularly in Italy and Spain, have been ploughing cheap funds
from the European Central Bank into buying more of their own
countries' bonds, a lucrative carry trade that has also helped
ensure governments can fund their deficits at sustainable rates.
Regulators partly blame a move by banks to rein in
cross-border activity and build up new liquidity buffers made up
predominantly of government debt as a way of reducing risk.
But the EBA's data - which updated core capital and holdings
of sovereign debt and loans at 64 leading European banks - is
likely to reinforce fears that the fortunes of the banks and the
states in which they are based are still too closely
It will also fuel a debate over whether all government debt
should be treated as equally risk-free when it comes to
calculating bank capital requirements.
In June this year, Spanish banks held 89 percent of the 199
billion euros of Spanish government debt held by the 64 leading
banks surveyed by EBA, up from 78 percent in December 2010.
There were some big jumps at individual banks. Santander's
net direct holding of Spanish bonds was 63.6 billion
euros at end-June, up from 45.6 billion at the start of the
Italian banks held 76 percent of the 274 billion euros of
Italian debt bought by the 64 banks, up from 59 percent.
Intesa Sanpaolo held 83.5 billion euros of Italian
bonds in June, up from 77.4 billion in December. UniCredit's
holding of Italian bonds rose to 56.8 billion from
48.9 billion six months earlier.
Figures for Ireland, Greece, Cyprus, Britain were also high,
with Finland the only one in single figures, at 6 percent.
With no pan-EU stress test of banks since 2011 and the
results of the next not due until October 2014, the EBA wants
analysts to mine the data and run their own checks in the
meantime to improve investor confidence and the standing of the
It said its figures confirmed that banks were becoming
better capitalised, if more domestically focused.
Capital held in the core buffers of the banks analysed rose
by 80 billion euros between December 2011, when the data was
last updated, and June this year.
Combined with a cut of 817 billion euros ($1.1 trillion) in
risk-weighted assets - in particular securitised debt and
derivatives - it led to an average core capital buffer of 11.7
percent, up from 10 percent at the end of 2011.
EU regulators say that, while their definition of core
capital is not fully compliant with the global accord known as
Basel III, capital levels at European banks are on a par with,
or better than, their U.S. peers.
Loans to companies, individuals and others fell 3 percent in
the 18 months to June. The figure may offer some relief to
policymakers who fear banks have slashed lending.
Leading EU banks undergo a review next year of the quality
of their assets to make sure they have been valued properly.
The process will be reinforced by a stress test of those
lenders. Any shortfall in capital will be announced in October
2014, part of wider efforts to draw a line once and for all
under doubts over the true health of Europe's banks.
The EBA's data covered only EU banks, except one from non-EU