OECD: 'Low bank capitalisation persists in many countries'

European banks remain at the heart of the euro area crisis despite actions to strengthen banks, according to the Organisation for Economic Co-operation and Development.

In a statement issued on Friday, the Paris-based organisation pointed out that low bank capitalisation continued to persist in many countries despite the EU requirement that banks reach a ratio of a minimum 9% of core tier-one capital to risk-weighted assets in 2012.

The organisation went on to suggest that the new benchmark hadn't been sufficient to boost confidence partly because it was based on risk-weighting of assets which understated risks due to reliance on banks' own internal risk models and the zero risk-weight given to sovereign debt.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The OECD suggests that the ratio of core tier one capital to unweighted assets of euro banks falls short of 5% in many cases.

If the euro area's largest banks were to move to a 5% standard, the current capital shortage is estimated at around €400bn, or 4.25% of euro area GDP, according to the OECD.

The OECD pointed out that this was not just a problem for banks in the 'periphery', explaining that there could be large capital needs in the major euro area countries.

The organisation added that future capital needs could be lessened if banks were required to separate commercial banking and market activities, reducing the total assets of the banking business.

MF