What is David Cameron so scared of? It might be the UK banks

By Carlos Díaz Güell, in Madrid | The deadline is January 20 for EU financial entities to submit to the European regulator their specific plans to comply with the capital demands determined by the European Banking Authority (EBA). For the Spanish entities, this demand amounts to €26bn, an amount that does not take into account certain peculiarities of the Spanish financial system such as the convertible bonds which amount to almost €10bn.

The European regulator, for calculation purposes, considers as valid core T1 capital convertible bonds that have conversions dates before October 2012. As a result, La Caixa and BBVA are the best positioned entities while Popular and Bankia are at the opposite end of the list.

In Santander’s case, with the already adopted measures such as the proposal to swap preferred shares for ordinary ones, the sale of participations in Santander Colombia and Chile, the sale of 7.8 % of Ahorro Corporación Financiera S.V. and, taking into consideration its €7bn in convertibles, the capital needed to meet EBA requirements is considerably reduced and can be covered via retained profits. In no case is it expected that the entities affected have any problem in meeting the requirements.

According to the EBA, it is the United Kingdom’s entities that are in the greatest need of core capital and it could be for this reason that its prime minister rejected the agreements of the Brussels summit. It is not in vain that the Bank of England in its last Financial Stability Report acknowledges in the short term a considerable elevation in risk for the financial stability of the United Kingdom.

Sovereign debt tension and their impact on the banking sector coupled with the deterioration of the perspectives for economic growth have increased considerably the probability that some financial event in the short term affect negatively financial stability.

British financial entities have been mainly affected by two factors. On the one hand, due to their high exposure to transnational assets on their balance sheets, their quality has been damaged by the evolution of European continental markets. Of this exposure, £15bn correspond to peripheral countries’ public debt, which represents 10% of core capital. On the other hand, due to the fact that one third of the entities’ financing comes from the wholesale markets, the evolution of the markets and their aversion to risk affects the banks’ ability to obtain liquidity, too.

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