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European Banks Face $1 Trillion Gap Before Review, Study Shows

European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study.

French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote.

“A comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks,” the authors wrote, referring to the central bank’s Asset Quality Review stage of the Comprehensive Assessment.

The Frankfurt-based ECB is conducting a three-stage assessment of bank assets before it assumes oversight of about 130 lenders across the 18-member currency bloc this November. Steffen and Acharya examined 109 of the 124 euro-area banks that will be part of the AQR, including Deutsche Bank AG, Credit Agricole SA, BNP Paribas SA and Banco Santander.

The authors see particularly high risks among German state-owned banks, or Landesbanken. “Germany has many government-owned institutions that may require capital issuances and/or bail-ins,” they wrote.

Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.

“Our results suggest that with common equity issuance and haircuts on subordinated creditors, it should be possible to deal with many banks’ capital needs,” the authors wrote. “Some will, however, require public backstops, especially if bail-ins are difficult to implement without imposing losses on bondholders, who may themselves be other banks and systemically important financial institutions.”

Particularly the banking sectors in Belgium, Cyprus and Greece “seem likely to require backstops,” they said.

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