WSJ confirms regulatory policy driven credit crunch in Eurozone

As the dust settles over the latest Greek bailout proposal, market participants are beginning to look at what the implications are for Eurozone banks.

Specifically, they are looking at how much more in the way of assets the banks are going to have to dispose of to still reach a 9% Tier I capital ratio by June given the hit to their Tier I capital caused by writing down Greek sovereign debt.

Regular readers know that bank book capital was rendered meaningless at the beginning of the financial crisis when regulators adopted the policy of regulatory forbearance and mark-to-market accounting was suspended.

Since bank book capital is currently meaningless, a regulatory policy of requiring the banks to reach a 9% Tier I capital ratio is meaningless for restoring confidence in the banks, but is meaningful in terms of the credit crunch it precipitates.

Frankly, Eurozone banks are not capable of internally generating capital quickly enough to offset the losses on the Greek debt or the future losses on the debt of Portugal, Spain and maybe Italy.

At the same time, due to a lack of disclosure, investors are unwilling to invest in the banks.  Would you invest in a black box and hope to see both return on and return of your capital?

What all this means for the Eurozone banks is that they have to cut back on lending.

A WSJ article confirms this regulatory policy driven credit crunch in the Eurozone

World financial markets may have breathed a collective sigh of relief over the rescue package for Greece, but European bank stocks have fallen since the announcement Tuesday. 

After a fourth quarter in which many of the Continent's banking institutions wrote down tens of millions of euros on their exposure to Greece, 2012 is likely to be a year of retrenchment as they work to meet strict capital requirements....

The €130 billion ($172.3 billion) Greek package, agreed upon on Tuesday, calls for private investors to take a 53.5% haircut, more than the 50% agreed on in October. Real losses will be as much as 70% after factoring in lower interest rates paid on new debt investors will receive in exchange for their existing Greek bonds. 

Analysts now expect banks to stay in defensive mode, hoarding cash and cutting back on their reliance on debt. Lending is likely to be limited to domestic markets. 

"Top-tier euro-zone banks are building up stocks of short-term liquidity, paring down risk assets to meet tougher regulatory standards for capital adequacy, and tightening credit standards," Standard & Poor's said in a recent note. 

The so-called Basel III rules, agreed upon by the Basel Committee on Banking Supervision, call for international banks to hold core Tier 1 capital ratios—a measure of their ability to absorb losses—of at least 7%. The rules also impose new requirements for bank liquidity and leverage. 

The European Banking Authority requires European banks to reach a core Tier 1 ratio of 9% by June 2012.