UK should participate in EU bank recap exercise

October 7, 2011

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The views expressed are his own.

Britain shouldn’t distance itself from the European Union’s bank rescue plan. The UK may wish to wriggle out of recapitalising its lenders on the grounds that the euro crisis is across the English Channel, but there are good reasons to play ball.

For Prime Minister David Cameron, stuffing more money into the country’s lenders is unappealing. The bailouts of 2008 and 2009 were one reason the Labour government lost the last election. And the UK hardly wants to spend more on banks when it is trying to shrink the deficit and maintain the country’s triple-A credit rating.

But there are three reasons to take part in the EU exercise. First, UK banks are currently seeking to raise their capital ratios by rapidly deleveraging. This is having a negative impact on the real economy. If banks had more capital, there would be a lower risk of a renewed credit crunch.

Second, the country’s banks are exposed to the euro zone. True, they have taken writedowns earlier than most of their continental peers; and they are not having as much difficulty raising funding as, say, French lenders. But an extra capital cushion would help secure funding lines and protect against a euro shock.

Third, Britain has a strong interest in the rest of the EU recapitalising its banks as part of solving the broader crisis. If Cameron opts out, he will not be able to press Germany’s Angela Merkel and France’s Nicolas Sarkozy to take action.

RBS would need the most capital, according to a Breakingviews analysis based on a more rigorous version of July’s discredited stress tests. If sovereign bonds were marked to market and banks were required to have a core tier 1 capital ratio of 8 percent in an adverse scenario, it would need 12.5 billion euros.

The government, which already owns 83 percent of RBS, would be on the hook. But the state has already promised a further 8 billion pounds in contingent capital. That could be turned into an instrument — such as a mandatory convertible bond — that counts as core tier 1 capital today.

Under the same scenario, Barclays would need 4.9 billion euros. But it might just be able to get away without a state shareholder, as it did in 2008 when it raised capital from the Gulf.

Either way, this is not a time for dilly-dallying. Cameron should hold his nose and drink this unpleasant medicine in the public interest. 

One comment

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The UK should not participate in any bailout of Euro area banks or European countries; indeed, we should not be in the EU since we never got the chance to vote on joining the ridiculous, dangerous and unworkable idea.

The EU is mad if it thinks that it can make huge life changing unilateral decisions without involving the voting public.

Every time they make decisions on imposing austerity or taxes foreign countries without gaining the backing of the population, they slide further towards the doom that always awaits dictators. Until they are consulted, people will resist, and what the EU is trying to impose will fail.

This when combined with the daily procession of lies (bank stress tests, bail out of sovereign debt etc) is why the market is so afraid of the consequences. Just look at the daily unrest in Greece. People are burning EU flags, just like in Syria or Libya where innocent citizens protest against evil dictators. This will only spread, once the Sovereign debt pain is passed onto taxpayers by the iditotic EU.

The eventual and inevitable break up of the Euro need not be disorderly, unless the powers that be make it so. An orderly break up, in the reverse of how the scheme was begun, would finally allow democracy back into Europe, and for voters to be able to choose who decides their national economic policy. Call it the European Spring.

We can all then print enough money to recapitalise our respective countries banks, and life can go on without fear.

Right now, we live in a dictatorship with 27 dictators.
That makes people afraid, very afraid.

Posted by CJ454 | Report as abusive