European Banks May Face Same Capital Threshold as U.S. Tests
Bankinter SA is among the lenders with the lowest capital ratios in the region. Photographer: Xabier Mikel Laburu/Bloomberg
Banks may be required to have a Tier 1 capital ratio of at least 6 percent under stress tests being prepared by European regulators, the same threshold U.S. lenders faced last year, according to two people briefed on the talks.
Firms that fail to meet the standard will be required to raise additional capital, said one of the people, who had seen a draft document from the Committee of European Banking Supervisors. Banks need to have a minimum Tier 1 ratio of 4 percent under international capital accords.
The CEBS draft document, dated July 13 and sent to national regulators for review, said countries agreed to use at least the same benchmark as the U.S., according to the person.
European Union regulators are examining the strength of 91 banks to determine if they can survive potential losses on sovereign-bond holdings. They are counting on the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal. The results are slated to be released starting at 6 p.m. Brussels time on July 23.
The stress tests assume a 3 percentage point deviation from the European Commission’s economic forecasts over two years and a deterioration of sovereign debt risk as compared to market prices in early May, CEBS said. The EU estimates the region’s economy will grow by 1 percent in 2010 and 1.7 percent in 2011.
Tier 1 Ratio
The Tier 1 capital ratio is a measure of financial strength which compares a bank’s capital to the exposure of its loans and other at-risk assets. It includes hybrid capital instruments such as bonds that convert into equity when certain events occur.
Banca Popolare dell’Emilia Romagna, Bankinter SA and Banca Monte dei Paschi di Siena SpA, among the lenders with the lowest capital ratios in the region, still have ratios of more than 7 percent, according to data compiled by Bloomberg from the lenders’ most recent filings.
CEBS coordinates national banking authorities and makes policy recommendations to the EU on regulation. Efstathia Bouli, spokeswoman for the London-based group, declined to comment.
To contact the reporters on this story: Meera Louis in Brussels at mlouis1@bloomberg.net;
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