Comparing the capital levels, capital composition and excess over supervisory requirements of Europe’s larger banks disproves the widely-held mantra of many analysts, investors and media that the European banking sector is structurally under-capitalised.
This erroneous view is still popular, especially in a global context; the unfavorable comparison with the large US banks a particularly common theme.
A brief report by Scope, out today, shows the comparative capital positions of 57 EU banks in 15 countries, three Swiss banks, and 11 banks from the other developed markets.
There are three main takeaways. First, all 57 EU banks exceed their 2018 SREP requirements. In the country-specific comparisons, which show the banks’ capital mix (available in the report), the 57 banks also exceed Scope estimates for 2019 SREP requirements.
Second, within the EU, specific SREP requirements differ in accordance with the supervisory jurisdiction. Nordic authorities (especially in Sweden) and the UK’s Prudential Supervisory Authority require relatively higher SREP levels than the ECB/Single Supervisory Mechanism. Total capital levels need thus to be assessed in this more relative context.
Third, Scope’s comparison of large banks’ capital positions in developed markets worldwide shows that the large European institutions are not under-capitalised compared to the large US groups. On the contrary, it shows a relative balance across the global large bank universe (Europe, US, Canada, Japan, Australia) going beyond the GSIB category.
Notwithstanding the above, “a strong prudential capital position may in the future prove to be a potentially softer line of defence against future shocks, some of which less likely to be captured by suitable metrics,” cautions Sam Theodore, team leader for financial institutions at Scope Ratings. Examples of this cited by Theodore include the impact of massive or repeated cyberattacks; blows to reputation stemming from misconduct, or from indifference to environmental and social issues; and inadequate governance.
If such negatives emerged, a solid prudential capital position would not represent a get-out-of-jail ticket in the eyes of customers and market participants
Scope publicly rates more than 25 large European banks. In addition, it covers a larger number of other European banks. Most Scope ratings of large European banks are in the A/AA- range. In line with our methodology, these ratings are not propped up by any expected State support notches.