About €300 billion?

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Since the financial story du jour is that European governments are starting to talk about bumping up the capitalization of their banks, I thought I'd pass along this estimate from Nomura published by The Economist:

If banks were to undergo a recession and mark to market their holdings of bonds issued by Greece, Ireland, Portugal, Spain and Italy, they would need more than €300 billion in capital (see chart).

Some thoughts that occur to me include:

• This is about the same size as the EFSF, but a lot of the help provided by the core of Europe to its perifphery is in the form of loans which are meant to be paid back. If they exchanged capital injections for equity in banks, then possibly they could limit the final cost of recapitalization in the same way that TARP did, by making a profit when bank shares recover. Otherwise, however, there's a difference between authorizing low-interest loans versus grants. And near-term, they still have to come up with the cash.
  
• Most likely, the distribution of recapitalization requirements amongst the different countries of Europe is different from the distribution of abilities to pay into a recapitalization fund, which raises the same problems of cross-border fiscal transfers that has been a political barrier to solving the sovereign debt crisis.
  
• Recapitalizing Europe's banks might head off a replay of the financial crisis, but it won't solve the underlying problems of economic growth (Europe sliding into recession) and sovereign debt. But maybe it is an effective way to kick the can one more time.
  
• There has tended to be a persistent disconnect between the hope surrounding future interventions by European policy-makers and the subsequent reality of the size and scope of each intervention that is actually passed. It's probably a good bet that when a concrete plan is finally announced, the size will be too small to reassure the market. Personally, I wouldn't be surprised if the most we get in the next announcement is what we've already got -- a commitment to use the EFSF to recapitalize banks as needed.

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Re: About €300 billion?

Some more speculation here:

Well, those close to the European Banking Authority (EBA) caution me that the important decisions have not yet been taken.

They say three things.

First, that the most serious impediment to sanitizing the European financial system is the intransigence of the French government.

France's banks are perceived to be weak by investors and creditors. But France's big banks and French ministers say the market is wrong. Which is why the French government is proving most resistant to the idea of credible stress tests and an ambitious plan to inject perhaps €200bn of additional capital into eurozone banks.

Second, my sources are convinced that Europe's banks will be adequately recapitalised. But what they cannot say is whether this will happen in a sensible orderly way, or whether it will only happen five seconds before midnight, when markets are melting down.

Third, officials and regulators tell me that of the €200bn that may have to be injected into banks, some will come from commercial investors, some from national governments and some from Europe's bailout found, the European Financial Stability Facility.

Or to put it another way, there won't be an American-style TARP rescue.

Instead there will be a slightly messier process, in which there is central determination - by the EBA, in collaboration with national regulators - of how much individual banks need, and then individual countries will decide how the money can and should be injected into their respective banks.