LONDON (Reuters) - Europe’s plan to strengthen its banking system is set to fall well short of market expectations, the Financial Times reported on Thursday.
The newspaper said the latest official estimates have identified a capital shortfall of less than 100 billion euro that must be made up over the next six to nine months.
The EU’s estimate of the necessary recapitalization effort compares with a recent IMF report that identified a 200 billion euro hole in banks’ balance sheets stemming from sovereign debt write-downs, the article said.
However, the FT said Europe’s estimates also falls far short of analyst estimates that banks might have a capital deficit of up to 275 billion euro.
The FT cites two people familiar with the outcome of an emergency stress test of Europe’s banks as saying the EBA, which ran the exercise, had suggested between 70 billion euro and 90 billion euro should be raised.
It is thought that figure would allow banks to meet a 9 percent threshold for their core tier one capital ratios, a measure of financial strength that goes beyond current requirements, after marking down to market values their sovereign bond holdings of the eurozone’s peripheral states.
A fierce political debate has started over almost all the main assumptions used in the analysis but people familiar with the discussions, cited by the FT, expect any changes to reduce, rather than increase, the estimated shortfall.
The newspaper said EU leaders are due to ratify the plan at the weekend, alongside a broader sweep of initiatives to strengthen the eurozone, including a well trailed project to use the European financial stability facility as a vehicle to guarantee national governments’ sovereign debt issuance.
Unnamed officials cited by the FT said the main reason for the different numbers was the EBA’s inclusion of the positive impact on banks’ capital position of applying market values to the region’s better-performing sovereigns, such as Britain and Germany, offsetting the peripheral “haircuts.”
Reporting by Stephen Mangan; Editing by Richard Chang