What does recapitalize the bank?

It seems that this year, the media want us to familiarize ourselves every day with new economic terms. If you recently were still talking about the risk premium , now a new term comes into play in the economic activity so frantic in which we are immersed : bank recapitalization .

Due to the poor state of the euro zone countries , many countries are on the brink, and from the IMF and the European Commission have sought ways for this to not infect banks of different countries , as they are exposed to a large amount of sovereign debt by participating in the rescue plans of these countries , such as Greece and Ireland.

It is for this reason that the financial sector has to recapitalize to increase the solvency of European banks , and reduce the value of sovereign debt they have in stock . But what exactly does recapitalize a bank or an entire financial system?

What does capitalize ?

In recent months, we have heard much talk of banks , both Spanish and European, have to recapitalize . Basically, what does the word recapitalize is to capture as much greater solvency funds to the company in question, in this case financial institutions. In this way , banks can meet its debt obligations over the medium and short term, and take the chance to give a sense of stability to the world that does not endanger the stability of the euro.

This plan will clear the balance sheet of banks in trouble, and therefore of the entire financial system . In many cases these funds come from the State , or an entire European Union , in others are the banks themselves who seek this help in financial markets , attending bonds or notes , or in some cases , becoming Corporations and capturing the funds of the Exchange.

In Spain , this had been attempted attack by the so-called Management Fund and Bank Restructuring ( FROB ) . Through this fund , savings banks merged and recapitalized should access by private capital. If after a time, had not been able to capture these funds , this fund was state of origin which brought the money , which in practice meant nationalization.

What is the reason for the recapitalization ?

In early June are given to all financial institutions in the so-called stress tests of banks , which measure the solvency and capital requirements of the same , that is, the money should adduced for the bank in question could be solvent . From these tests , we can know which entities need capital and which are not.

Due to strong sovereign debt storm affecting Europe for some time , and especially fears of default ( or default ) of certain countries such as Greece , from Brussels is intended that banks have the least possible exposure to these debts , for an eventual removed , ie, what is sought is the least possible impact on the balance sheets of banks if debt finally cut to certain countries.

If not undertaken in this way , assuming that eventually had a reduction of debt, money banks would cease to win, and that they would seriously prejudice. That is why from Europe have demanded new stricter credit criteria , and if banks do not receive these funds , many do not come to this solvency .

The problem is that from Brussels are talking about the entire European financial system as a whole and not as separate banks . This means that even solvent financial institutions , which have passed the stress test with no problems in principle should also access . Banks such as Santander and BBVA have already risen in arms , and do not want to access this cash injection , arguing that perhaps are other financial institutions that have more capital needs.

According to the IMF , to overcome all this , Europe must inject no less than 200,000 million Euros to clean up the entire system, supposedly rescue fund , intended primarily for those countries in trouble and now is used for other tasks differently. We should be more cautious in Europe to implement some plans, you may not serve for what are intended initially .

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