Moody's warns European banks need more cash

Updated: Thursday, 24 Jan 2013 18:06

Banks in Ireland, Spain, Italy and Britain need to set aside much more money to cover potentially bad loans, credit ratings agency Moody's warned today.

European banks have already raised hundreds of billions of euros to cover possible losses from loans that soured in property and financial market crises.

Much of the funding has come from governments.

"We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets," Moody's said in its global banking outlook for 2013. 

"Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans," the report added. 

"This strategy of buying time limits a bank's capacity for new lending and poses risks for creditors of European banks,'' it said. The agency did not say how much extra money banks would need.

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"Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans," the report added.

"This strategy of buying time limits a bank's capacity for new lending and poses risks for creditors of European banks,'' it said.

The agency did not say how much extra money banks would need.

Moody's said it believes 2013 will be a volatile year for Europe's banks, but expects their credit ratings to remain relatively stable after a raft of downgrades in 2012.

The agency's outlook for US banks is negative due to a challenging home market, while its outlooks for Asia/Pacific, Emerging Europe and Latin America are stable.

Meanwhile, rival agency Fitch also warned today that British banks could be underestimating the riskiness of their property loans and may need more capital to correct this.

Fitch's view on British banks' assessment of risk chimes with comments from the Bank of England in November. The Bank of England said Britain's four biggest banks - HSBC, Barclays, Royal Bank of Scotland and Lloyds - could be over-stating their capital levels by between £5 billion and £35 billion sterling because of the way they measure risk.

Britain's Financial Services Authority is reviewing how banks weight the riskiness of their loan books and lenders will be told by March if they need to beef up their capital reserves to protect against loans going sour. The results of the review are not expected to be made public.

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