Media Briefing Note: European Banking Authority to Discuss Banks' Capital Restructuring Plans

London, 6 February 2012 - Commenting on the news that the Board of the European Banking Authority will next week discuss and most likely challenge capital restructuring plans put forward by leading banks to meet new capital requirements, Steven McEwan, Senior Consultant in Hogan Lovells' Financial Institutions Group, said:

"These developments show the dilemma faced by regulators when they encourage improvements in banks' regulatory capital positions.  On the one hand, it is clearly important to prevent banks from failing, and the more capital they hold, the less likely they are to fail.  On the other hand, it is important to avoid setting the financial markets against those banks which do not achieve the improvements, as this may make their existing position worse.

It is interesting to look at the methods used by the banks to improve their capital positions.  Rights issues bring in new money, and provide a true strengthening of the capital position.  However, there is an understandable concern that reducing risk weights does not have this effect – it amounts to the bank arguing that it does not require as much capital as was previously thought, so that its capital position does in fact meet the desired standards without having to make any other changes.  The risk is that, by  incentivising banks to adopt this approach, a stronger banking system is less likely in the longer term."

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