Banks will have to try and raise the cash themselves by an agreed deadline, whereupon sovereign states will then use public funds to bring them up to the required level for those that have failed to tap up private investors.
Analyst estimates for the cost fall into a wide range of €100bn-€400bn, with Goldman Sachs suggesting that 50 of the 90 banks being stress-tested in order to generate their capital targets will fail the exercise. Credit Suisse suggests 66 will fail.
More important than the pass rate for the tests, however, will be the timeline for raising capital. JP Morgan analyst Kian Abouhossein called it “unrealistic”, saying: “The discussed six to nine months timeframe to reach adequate capital levels without euro [mass bailout] is unacceptable… Bank equity investors need immediate capital injection through mandatory convertibles by governments – not a six to nine-month time vacuum.”
Overall, investors are cautious on Spanish, Italian and French banks and more relaxed about UK banks, which are not expected to need to raise capital. The consensus on German banks is more mixed.
Deutsche Bank chief executive Josef Ackermann has vocally opposed imposing large losses on banks that hold a large number of Greek bonds and has said any recapitalisation should be selective and limited rather than taking a blanket approach.
FAST FACTS | STRESS TESTS
● The third round of EU stress tests will be used to work out which banks need to raise cash.
● They are believed to have a pass rate of a 9 per cent core tier one capital ratio after writing down sovereign bond holdings to market prices.