Euro bailout fund may use subsidiaries to recapitalise banks

BRUSSELS Sun Mar 3, 2013 11:33pm IST

An employee counts Euro notes at the Bank of Taiwan head office in Taipei May 10, 2010. REUTERS/Pichi Chuang/Files

An employee counts Euro notes at the Bank of Taiwan head office in Taipei May 10, 2010.

Credit: Reuters/Pichi Chuang/Files

Related Topics

BRUSSELS (Reuters) - The ESM euro zone bailout fund could set up subsidiaries to directly recapitalise banks to limit the negative impact that buying bank equity would have on its credit rating and lending capacity, a euro zone official said.

The Eurogroup of euro zone finance ministers meets on Monday to discuss which banks should be eligible for direct recapitalisation from the European Stability Mechanism (ESM).

"Setting up subsidiaries is one of the options that has been discussed and will be discussed, although it is not on the agenda for this Monday," said the official, who has knowledge of the discussions.

Government leaders decided last year that the ESM could buy stakes in banks that hit trouble because the value of the government bonds on their books fell dramatically in the euro zone crisis.

Recapitalising banks via subsidiaries would help break the circle of ever more indebted governments borrowing to recapitalise banks, which need recapitalisation because they buy bonds of the government.

"The option of subsidiaries would allow the ESM to fulfil several goals at the same time -- break the negative loop between sovereigns and banks, limit the impact of recapitalisation on its lending capacity, keep as high a credit rating as possible and not ask for more money from euro zone governments," the official said.

Investing in equity is more risky than lending to governments so the ESM, which has a 500 billion euro lending capacity, would have to make provisions for the extra risk -- thus limiting its firepower over a normal loan.

The official said that according to some calculations, one euro invested in bank equity reduced the ESM's lending power by 3 euros.

ESM subsidiaries for bank recapitalisation would be set up using money raised on the market by the ESM via bonds, the official said.

Recapitalisation via a subsidiary would mean that every euro invested in a bank would reduce the ESM's firepower by only 1.5 euros, the official said.

The ESM can borrow on the market thanks to 80 billion euros of paid-in capital and 620 billion of callable capital. This arrangement also ensures the fund has the highest credit rating.

The official said ,however, that to safeguard the rating and lending capacity, the governors of the ESM -- euro zone finance ministers -- were also discussing a limit on the total amount that the fund could spend on recapitalisation in general.

Germany favours a top limit of 80 billion euros.

A further safeguard would be that the country of the bank would also have to participate in the recapitalisation to some extent, "to retain some skin in the game" and create incentives for the authorities to monitor the bank. (Additional reporting by Michelle Martin in Berlin; Editing by David Cowell)

FILED UNDER:

Reuters Showcase

GDP Growth

GDP Growth

India revises up 2013/14 GDP growth to 6.9 percent.  Full Article 

Pharma Deal

Pharma Deal

Sun Pharmaceutical wins U.S. approval to buy Ranbaxy  Full Article 

Adani Restructuring

Adani Restructuring

Adani hives off power, ports businesses to boost growth.  Full Article 

Bank of Baroda

Bank of Baroda

Q3 net profit down 69 pct on higher provisions  Full Article 

Trading Fees

Trading Fees

BSE slashes fees in FX derivatives battle with NSE  Full Article 

SpiceJet Turnaround

SpiceJet Turnaround

SpiceJet board approves up to $243 mln share sale plan  Full Article 

Currency Market

Currency Market

RBI urges companies to hedge FX exposure  Full Article 

Banking Sector

Banking Sector

Banks say no room to cut lending rates, thwarting RBI easing  Full Article 

Reuters Poll

Reuters Poll

RBI seen holding rates steady on Tuesday, minority of analysts expect cut  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage