Almost all banks under the European Central Bank's direct supervision have more capital than required under an ongoing review, a senior ECB bank supervisor said on Tuesday. The ECB's Single Supervisory Mechanism (SSM) assumed oversight of the euro zone's 123 largest banks last year and is in the process of setting individual capital requirements for those lenders as part of its Supervisory Review and Evaluation Process (SREP).
"Almost all banks will have a surplus of capital over the SREP requirements (excluding systemic buffers)," Luc Coene, an SSM supervisory board member said in a presentation in Dublin, detailing the preliminary outcome of the review. Coene's comments go further than ECB President Mario Draghi, who last week said "most" have capital levels above the requirements. The ECB sent draft letters with its requirements to individual banks earlier this month and is now hearing their arguments before it makes final decisions in November. These decisions will not be disclosed.
One of the disagreements between the ECB and certain banks relates to counting Deferred Tax Assets (DTAs), an instrument that grants tax breaks to companies when reporting losses or against certain provisions, towards the companies' capital. Coene said that if all DTAs were to be deducted from banks' capital, they would shave 300 basis points off the fully-loaded Core Equity Tier 1 capital of the average bank. Spanish and Italian banks are the main beneficiaries of DTAs in Europe. Spain said on Monday it would change the way these tax credits are used by banks to head off concerns that the tool may break state aid rules.
A source told Reuters earlier this year that around 80 percent of the institutions supervised by the ECB will be required to hold a CET1 ratio of between and 9 and 12 percent, with half of the total having to hold a CET1 of 10 percent. Leading banks on both sides of the Atlantic have come under market and supervisory pressure to hold capital well above minimum legal requirements, with a core ratio of 11-12 percent seen as the new norm compared with a fraction of this level before the financial crisis.