Frankfurt: European politicians on Thursday rejected an International Monetary Fund call for banks to raise up to 200 billion euros ($290 billion) in new capital, adding to fears that policymakers may be underestimating the severity of the debt crisis.
IMF chief Christine Lagarde's call on Saturday for mandatory capitalisation of European banks to prevent a world recession has reignited a debate over whether they have raised sufficient capital to withstand a severe downturn.
The IMF, the International Accounting Standards Board (IASB) and bank analysts have voiced concerns about a capital shortfall, while European regulators, politicians and banking associations argue that banks have a sufficient cushion to cope with market turbulence and worries over sovereign debt after several rounds of capital raising across the continent.
A European source told Reuters on Wednesday that the IMF had estimated European banks could face a capital shortfall of 200 billion euros, a figure rejected by European bankers and policymakers.
The IMF figure is much higher than European Union estimates of banks' capital needs following stress tests in July which revealed banks needed to raise 2.5 billion euros ($3.6 billion), less than had been expected before the tests.
The bank stress tests failed to account for significant losses on sovereign debt held on bank balance sheets, a factor criticised this week by accounting body IASB, which said European financial institutions should have been more consistent in booking losses on Greek government bonds.
Writedowns disclosed in bank results have varied between 21-50 per cent.
In a note sent to institutional clients on Aug. 16, a Goldman Sachs strategist argued that European banks needed as much as $1 trillion in capital, The Wall Street Journal reported. The piece failed to make clear by when the capital was needed.
Matthew Clark, banking analyst at Keefe Bruyette & Woods said it was important to determine the nature of a capital shortfall, and to distinguish between banks struggling to refinance themselves on a day-to-day basis and banks that can use retained earnings to meet future regulatory requirements.
Key parts of Basel III regulatory requirements do not come in to force until 2013, Clark said, giving banks some time to plug the gap.
European bank shares were lower at 1416 GMT, with the Stoxx 600 banking index down 1.2 per cent.
Figures on Thursday showed euro-priced bank-to-bank lending rates edged higher, driven by concerns about the outlook for the economy and euro zone banks.
The three-month Euribor rate -- traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending -- ticked up to 1.543 per cent from 1.542 per cent.
The fight over whether European banks have sufficient capital highlights a flaw in the accounting treatment of sovereign debt, experts say.
"One enormous weakness is that European banks are encouraged to load up on sovereign debt without pricing in the appropriate risk penalty," said Roger Myerson, winner of the Nobel memorial prize in economics in 2007. "It creates the wrong incentives for governments and banks."
Myerson, who was recognised for his contributions to mechanism design theory, said that under Basel accounting rules, sovereign debt is still given a risk weighting of zero.
This encourages banks to buy risky debt without having to build an appropriate capital cushion, and provides an incentive for governments not to address their deficit levels since they are still able to issue debt.
"This looks like the entire problem of the euro zone," Myerson told Reuters.
JP Morgan has estimated that based on the stress-test data, European banks showed a capital deficit of 80 billion euros, with UK banks needing 25 billion euros, French banks 20 billion euros and German lenders 14 billion euros.
The European Commission reiterated on Thursday it saw no need for drastic action since the publication of the stress test results, echoing comments made by the European Banking Authority on Tuesday.
Eurozone governments and the European Central Bank disagree with the "very questionable" methodology of the IMF estimates on bank capital requirements, another European government official said. The European Central Bank declined to comment.
The view was echoed by the German Banking Association BdB which represents lenders such as Deutsche Bank and Commerzbank, and the VOEB, which represents troubled lenders such as WestLB. Both questioned the IMF's methodology and insisted there was no immediate need to inject capital into German banks.
France took a similar line on its banks, whose shares came under intense pressure during August amid concerns over access to funding, with French Budget Minister Valerie Pecresse saying they were not a cause for concern.
"French banks are now better capitalised than a year ago; they passed stress tests which were extremely tough less than a month ago. I don't think there is any cause for worry over French banks," she said at an event on Thursday.
Dutch Finance Minister Jan Kees de Jager said he could not speculate on the 200 billion euro IMF figure, but added: "A sovereign debt crisis never comes alone. The risk from a sovereign debt crisis is the connection with the banks. Contagion of a sovereign debt crisis usually happens through the banking system. We cannot see these two separately."
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