EU banks using a variety of strategies to avoid issuing stock or accepting public funds

A Bloomberg article looked at the strategies banks in the EU are using to achieve the 9% Tier I capital ratio without issuing new stock or accepting public funds.

Each strategy is an example of how a bank's capital ratio can be manipulated without reducing the risk of the bank.  These strategies include adjusting the risk weighting on loan books, selling business lines and not renewing old or making new loans.

In other words, without utter transparency into each bank's exposure details, it shows how meaningless bank capital ratios currently are.

Banks (BEBANKS) may choose to hold on to profits and recalculate risks on loan books rather than take state cash to meet extra capital requirements designed to make them withstand Europe’s sovereign-debt crisis.... 

“Banks want to be autonomous from governments and they value this higher than some business lines,” Nicolas Veron, a senior fellow at Bruegel, a Brussels-based economics research group, said in a telephone interview. “At this point, however, no option is attractive. That’s why we see the turmoil in the banking sector.”...  

Commerzbank said it had fulfilled 57 percent of its EBA requirement by the end of 2011 through retained earnings of 1.2 billion euros and reducing risk-weighted assets....

Banco Santander SA (SAN), Spain’s biggest bank, was required to plug a 15.3 billion-euro shortfall. 

The bank said Jan. 9 it had met EBA’s requirements as it sold stakes in South American lenders, issued new stock in exchange for preferred shares and paid dividends in shares. The bank is also counting 6.83 billion euros of bonds sold to retail customers that automatically convert into shares.

The Wall Street Journal ran an article on three major European banks that are struggling to meet the 9% Tier I capital ratio.

Just six months after issuing billions of euros of new stock to investors and raising hopes the European banking sector was on the mend, three big lenders in key euro-zone economies have been hit by a fresh wave of problems. 

Germany's Commerzbank AG and Italy's Banca Monte dei Paschi di Siena SpA are scrambling to come up with billions of euros in new capital to comply with European regulations. That is raising the prospect they might need to go back to their beleaguered investors—or taxpayers—for fresh rounds of aid....

The travails of the three banks, coming so soon after they tapped the markets for capital, are likely to make investors even more reluctant to put money into cash-strapped European lenders, analysts and investors say. 

"It's extremely difficult to make a rational call as to whether some of these banks are investible," said Ian King, the head of International Equities at Legal & General Asset Management in London.

As this blog has noted repeatedly, if banks were required to provide utter transparency on their current exposure details, it would be easy for investors to assess the risk and prospects for the bank.  The result of this assessment would allow investors to make a rational decision on whether to buy some more equity at current prices.