Eye on the Market I September 25, 2011 J.P Morgan mean meet a Topics: A note from the European Banking Authority As per the note below, the European Banking Authority (EBA) holds the global investment community hostage by insisting that EU banks, in their entirety, only need another 3 billion Euros in capital. The markets do not believe this, or we would not be seeing wholesale deposit flight from EU banks by US money market funds (see Appendix chart), a shutdown in unsecured EU bank debt markets, and rising pressure on the ECB to finance European banks (Spain and Italy have been very active borrowers recently). According to the Institute of International Finance, European banks have raised 320 billion Euros in capital since 2008, but the EBA's view of capital sufficiency is in the minority. Most sell side research estimates of EU bank capital shortfalls are 10x-20x higher than the EBA's estimate; buy side estimates we have seen are 40x-50x higher. The IMF mentioned 200 billion Euros, but IMF Director Lagarde appears to have backed down from this due to the controversy it created (she now says such estimates were "tentative"). She has good company. however: the German economic institute DIW, in an interview with Frankfurt Allgemeine Sonntagszeitung, believes German banks atone need 127 billion in capital. T e T Ile N RAIL Nana i \ s MIND n T C ril Mun i tY! ! \pi a D 0 nr t Tin Nk our Eu /10 1 Ot mote cal P i TN/ Ce II He '' hi:FE 11// CeidY 11112 N se Nte N4 t e re 7- sItoRital / ' s NuaT S t r / C 3 ID s s A L o n on! s : \ f v u diarler eO wi t h t/ t h e dEPOS i ll IS a b o w n irs t par a g c ar Ni wi i t Neap i gNalti ng you On of E B A , 25 a I ) CO 1 Br . 0 t 181 re r wine , oad O Before getting to what the markets may be waiting/hoping for, here are some things to know about EBA stress tests: I. Only sovereign debt held in bank trading books was assumed to bear loss,