EU watchdog says must learn from Japan and speed up fixing banks

By Huw Jones

LONDON (Reuters) - Europe must heed the lesson from Japan and tackle its "zombie banks" as fast as possible without going soft on capital requirements, a top European Union banking watchdog said on Wednesday.

Andrea Enria, chairman of the European Banking Authority, said some of Europe's banks share the characteristics of poorly performing banks in Japan in the past, such as overcapacity and too many bad loans on their books.

"I hope we don't share the time needed to fix it. I hope that we will be able to move faster," Enria told a Wall Street Journal event.

Investors have sent shares in Deutsche Bank to record lows as the prospect of a large fine in the United States looms. Italy's Monte dei Paschi di Siena is also studying options to save its centuries-old business from being wound down.

The ratio of bad to good loans across European banks averages well over 5 percent, three times higher than in Japan or the United States, Enria said.

He reiterated that state aid could be one of the "ingredients" for cleaning up bank balance sheets, but only after private investors have paid their fair share.

Credit Suisse Chief Executive Tidjane Thiam told a separate event in London that banks were in a "very fragile" situation that puts off investors.

Lenders should focus on cutting costs to raise weak levels of returns on equity, Thiam said.

UBS Chief Executive Sergio Ermotti told the SIBOS conference in Geneva that banks were also having to compete with "new entrants that are not facing regulation".

But asked whether capital requirements should be eased for lenders in Deutsche Bank's situation, Enria replied: "I don't think that relaxation of capital requirements is a tool for the improvement of the situation of banks."

Adding to pressure on banks in the European Union is the need to issue bonds known as MREL, which can be written down to replace capital burnt through in a crisis.

The amount of MREL each of the top 140 banks in the euro zone must hold will be set by the Single Resolution Board.

"This year we will not take MREL decisions for each and every bank," Joanne Kellerman, director of resolution planning and decisions at the SRB, told the WSJ event.

The focus is on the overall quantity, and not on where the bonds are located in the banking group, their exact quality, or phase-in to full compliance.

The quantity figure will take into account an EU rule that requires shareholders and creditors to bear losses equivalent to 8 percent of the bank's liabilities before public aid can be considered, she said.

"Will it be an enormous extra burden on the banking system? We very much question that," Kellerman said.

An enormous amount of bank bonds need to be rolled over between now and 2019 in any case, she added, referring to billions of euros worth of debt, and MREL will come as a relief and not as a shock to the market.

(Additional reporting by Anjuli Davies in London and Tom Bergin in Geneva; Editing by Ruth Pitchford)