Europe’s banking system has a higher capital shortfall than previously estimated, the European Banking Authority’s (EBA’s) latest round of stress tests shows.
European banks now have to add a total of €114.7 billion (£97.9 billion) to their capital positions, up from the deficit of €106.4 billion that was estimated in October. Much of the extra capital has to be raised by Germany’s banks.
The increase in the shortfall is attributed to the collapse in the value of government bonds owned by many banks. The new estimate looks at the price of bonds at the end of September, while the October stress test used the higher valuations seen in June.
Banks have to outline their plans to make up capital shortfalls by January 20 and have to raise the required money by June.
“Banks should first use private sources of funding to strengthen their capital position to meet the required target, including retained earnings, reduced bonus payments, new issuances of common equity and suitably strong contingent capital, and other liability management measures,” the EBA says.
But the authority reminds banks that they should attempt to raise capital without significantly cutting back on their lending. “National authorities and the EBA will seek to ensure that the actions taken to comply with the set requirements do not lead to significant constraints on the credit flow to the EU real economy,” it adds.
The German banking system was shown to be much weaker than previously thought in the latest round. In October, Germany’s banks were thought to have a capital shortfall of €5.2 billion but this has been increased to €13.1 billion.
The capital buffers are not specifically designed to cover losses from the sovereign debt crisis but are intended to reassure the markets of banks’ ability to withstand a range of external shocks. However, once the debt crisis is resolved and sovereign bond valuations recover, the size of the required buffers will be re-assessed.
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