Europe Banks vow $1 trillion cuts as recapitalisation looms

European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.

Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about $1.06 trillion in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements, according to data compiled by Bloomberg.

Morgan Stanley predicts that amount could reach 2 trillion euros across Europe by the end of next year as banks curb lending and sell loans and entire businesses. A lack of buyers and the losses lenders face on loan sales are making those targets unrealistic. “Asset sales are impractical in the current environment,” said Simon Maughan, head of sales and distribution at MF Global UK in London. “Every bank is selling, and no bank is buying. It just won't work. Beyond that, the magnitude of the cuts the banks are talking about is nowhere near the likely required amount of deleveraging. They need to reduce hundreds of billions more...There has to be a recapitalization.”

European Union leaders are seeking to boost bank capital as investors prove reluctant to provide short-term funding, in part because of concerns that lenders face more writedowns of sovereign debt from Greece and other southern European nations. They may require that banks increase core capital to 9 percent of risk-weighted assets from 5 percent within six months, seven years ahead of the target set by the Basel Committee on Banking Supervision, according to a person with knowledge of the plans.

Banks in Europe may need 100 billion euros to 230 billion euros of additional capital to meet the requirements, according to estimates by Morgan Stanley and JPMorgan Chase & Co.