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After months of standing still, major European banks are on the verge of making big moves to shore up their rickety balance sheets as regulators prepare to finalize tough new capital rules for financial institutions.

Germany's largest bank, Deutsche Bank AG, is preparing to launch a massive rights offering that could raise as much as €9-billion ($11.8-billion), Bloomberg reported, citing unnamed sources. Martin Blessing, chief executive officer of Germany's second largest lender, Commerzbank AG, said his bank must explore a number of options to become self-sufficient and pay back the almost €20-billion the German government injected into it the wake of the financial crisis. Analysts believe that likely means the bank will raise billions in new equity.

The expected moves come long after U.S. banks went through a major round of raising equity in 2009. Unlike the European regulators, U.S. and Canadian regulatory bodies have leaned on their banks to boost their capital reserves in case the markets continued to plummet.

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European banks have been slower to fix their financial problems coming out of the 2008 financial crisis. While U.S. banks underwent so-called "stress tests" almost 18 months ago, which forced the weakest ones to raise money, European institutions just went through the latest round of tests in the spring and summer. And even then, many experts said Europe's tests were much too easy to pass.

Now, slightly more than a month after the results came out, European banks are back in the spotlight, as more investors worry about their health amid the debt problems of EU countries such as Greece and Portgual and continued woes in the housing markets of countries like Spain and Ireland.

"As a group, the EU banks are far weaker than their U.S. peers," said Christopher Whalen, managing director at Institutional Risk Analytics. His outlook for the European financial sector is quite negative. Because the banks are in such bad shape, he expects them to start restructuring later this year and in 2011.

However, "the good news is that EU officials seem to understand that both corporate and sovereign restructuring is inevitable," he said.

In fact, some restructuring has already begun. This week the Irish government broke apart Anglo Irish Bank, the country's third-largest bank, into two pieces. Now the government-owned institution has two divisions: one part that holds customer deposits and good loans, and another that holds the bank's large portfolio of bad loans.

The move was well received by investors, who ultimately increased their demand for Ireland's government bonds on Thursday.

With a key meeting of regulators coming this weekend in Basel, Switzerland, investors are waiting to see how the other European banks will respond. Earlier this week, officials leaked an expected capital range that could see global banks required to maintain a so-called Tier 1 capital ratio of 7 to 9 per cent. That's much higher than current capital levels.

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While some European banks might have trouble meeting these limits, RBC Dominion Securities Inc. bank analyst Gerard Cassidy said there isn't much reason to worry about U.S. banks. Analysts also expects the Big Six Canadian banks will be relatively unaffected by the new rules, because their capital ratios are well into the double-digits.

Mr. Cassidy added that the U.S. banks are benefiting from the acute fears that hit the market in 2008 because they forced bank executives to get their act together quickly. Conversely, European banks have until now been expecting to "bleed their problems out over many quarters or years."

Mr. Whalen agrees that European banks are going to have trouble responding to the increased scrutiny, but he does not think U.S. banks are in the clear. "All that we bought in the U.S. with the Fed [easing]and bank rescues was time to fashion a plan," he said.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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