Ending ‘Doom Loop’ Could Cost European Banks Billions in Capital
- $195 billion capital needed in punitive scenario, Fitch says
- Issue is significant stumbling block for banking union
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Changes to the capital treatment of sovereign bonds discussed in Brussels and Basel may force European banks to raise as much as 171 billion euros ($195 billion) in new capital or sell 492 billion euros of the securities, according to research published on Wednesday.
European banks own about 2.3 trillion euros of sovereign debt, of which about 1.5 trillion euros, or 65 percent, was issued by their home country, according to a report from Fitch Ratings. These are mostly treated as risk-free and don’t attract capital charges, an assessment that was called into question when the euro debt crisis exposed possible contagion between countries and their banks, sometimes dubbed the “doom loop.”