RBS Write-down and Rights Issue Ups the Ante for Banks
European banks have been slower than their American counterparts to write down their subprime-related losses and bolster their balance sheets through the raising of capital. Royal Bank of Scotland (London: RBS) is doing its best to remedy that discrepancy with its $24 billion rights issue and $12 billion of write-downs.
RBS’s moves, along with an asset sale are an embarrassing admission that the bank’s acquisition of ABN-AMRO last year had stretched the bank’s reserves way too thin. Still, RBS chairman Sir Fred Goodwin did not sound too red-faced on the conference call, according to FT Alphaville.
In a video Financial Times banking editor Peter Thal Larsen says the biggest ever rights issue in Europe will put pressure on other European banks to clean up their balance sheets.
Felix Salmon at Portfolio.com welcomed RBS’s moves.
Overall, this might not be great news for RBS shareholders in the short term - the stock opened down about 4% on the news - but it’s good news for the UK and even the global financial system in the medium term.
“Right now, it’s good to have too much capital, rather than just enough. Would that more institutions followed suit.”
The New York Times says bank write-downs are approaching $300 billion and could reach $750 billion. Banks have raised about $160 billion so far, implying that further capital infusions are likely to be needed.
The Times reports that for many banks, raising more money from investors might help them lower future write-downs, said Stuart Plesser, an analyst at Standard & Poor’s Equity Research. He said that banks with better capital would be able to shift securities into the category they planned to hold, rather than sell, and avoid some write-downs.
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