Europe’s banks face core Tier 1 requirements of 5%

Europe’s banks need to meet Core Tier 1 capital ratio requirements of 5% from the end of this year, as the new European banking regulator puts pressure on institutions to bolster their underlying financial health.

Under the new Core Tier 1 (CT1) benchmark set today by the European Banking Authority (EBA), banks across Europe will be asked to hold onto 5% of their core assets to help protect against insolvency.

The new European super-regulator says the benchmark, which is not legally binding, will have to be implemented by all European Member States by 31 October 2010.

In turn, banks will be expected to start meeting the new requirements from 31 December 2010, effectively requiring the 5% buffer in 2012.

It brings forward the pressure on Europe’s financial institutions to boost their Core Tier 1 capital, as previously the Basel Committee set the requirement at 4.5%, to be met by 1 January 2013.

If banks do not meet the 5% target assigned in the new “stress tests” issued by the EBA, local regulators will be compelled to look into the institution and agree a plan with the bank so it does ultimately meet that target.

The new benchmark has been set amid political pressure to offer a solution to bailouts granted to banks across Europe by governments, and ultimately taxpayers, during the financial crisis in late 2008 and early 2009.

It is hoped by the regulator the new benchmark will help protect against collapse if banks run into difficulties, and in turn prevent future bailouts.

Terms for what commercial instruments are classed as CT1 were also issued today, along with the 5% benchmark.

Instruments must be “simple, issued directly by the institution itself and able, both immediately and without any doubt, to meet the criteria of permanence, flexibility of payments and loss absorption in going concern situations”, the EBA said.

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