Large European banks are lagging the world’s other big banks in their preparation for new capital requirements, notes Moody’s Investors Service in a new report.
The rating agency reports that the European Banking Authority (EBA) published data showing that a number of the large European banks are behind their global peers in meeting the new more stringent capital and liquidity rules, known as Basel III.
“The lack of progress toward the new Basel III benchmarks, highlighted in the EBA report, is credit negative for the laggards because it points to weaknesses in their business models and underlying profitability,” it said. And, these banks will likely face higher funding costs, it said, “because investors will demand compliance long before the scheduled full implementation of Basel III in 2019.”
Moody’s says that the data shows that, while large European banks have made progress toward meeting Basel III targets, their capital levels are lower, relative to the rest of the world. The average common equity tier one ratio of large EU banks under Basel III was 6.9% at year-end 2011, compared with 7.7% for global large banks. And, only 49% of EU banks had a Tier 1 ratio above the 7% minimum at year-end 2011, versus 71% for global large banks, it reports.
The gap is even larger for the banks’ average liquidity coverage ratio (LCR), it says. The average LCR at year-end 2011 was 72% for the European banks, compared with 91% for large banks globally.