LISBON Official efforts to make euro zone banks build bigger buffers against risk are backfiring by preventing them from scaling down exposure to vulnerable sovereign debt, the head of Portugal's Banco BPI told Reuters.
Due to the country's debt crisis, BPI has had to tap a recapitalization line for banks from the bailout just as tax hikes and spending cuts since Portugal's 2011 bailout have produced the deepest recession since the 1970s.
BPI's (BBPI.LS) CEO Fernando Ulrich said the need to maintain high capital buffers severely limits the bank's ability to repay these loans to the state as early as possible.
Interest paid on the loans cut BPI's first-quarter net interest income.
"For BPI and other Portuguese banks this European Banking Authority rule currently in force may have the opposite effect from what is intended as it ties banking risk to sovereign risk," said the CEO of Portugal's third-largest listed lender.
"The EBA should change its rules because applying them now is completely irrational," he said, adding that BPI has raised the issue with the government and its lenders - the European Union and International Monetary Fund.
The EBA rule, Ulrich said, was fair when introduced in September 2011, when EBA set the size of the buffer at 1.184 billion euros ($1.54 billion) and BPI's exposure to sovereign debt was worth around 5.5 billion euros.
But after many of the bonds were cashed on expiry and the price of others rose as investors became less anxious about the euro zone, BPI says its capital need on European debt holdings of 3 billion euros has fallen to just 467 million euros.
The loans from the bailout line are held in contingent convertible bonds that carry high interest payments and give the state voting rights if not repaid in time.
"If BPI could reduce (the buffer) by 717 million euros, we could go to the state and repay these 717 million," he said.
BPI has already decided to make early repayments of 300 million euros, but that still leaves it with 900 million euros in bailout loans. Banks have used about half of 12 billion euros earmarked for them under Portugal's 78-billion-euro bailout.
Of 3 billion euros in European government bonds held by BPI now, 1.7 billion euros is Portuguese debt, and most of the rest is Italian and Irish debt. The bank says it made good capital gains selling bonds last year and in the first quarter, but can't sell any more because of the buffer.
BPI, in Ulrich's view "is most certainly well-capitalized... it even has too much capital". At the end of March, BPI's core Tier 1 capital ratio stood at 9.6 percent under EBA criteria and at 15 percent under Bank of Portugal criteria, meeting their respective minimum requirements of 9 and 10 percent.
($1 = 0.7689 euros)
(Reporting by Andrei Khalip; Editing by Ruth Pitchford)