Loans made available to governments by the European Financial Stability Fund (EFSF) in order to recapitalize banks will be accessed as a last resort, and lenders who benefit from them will be restructured, according to a plan that will be discussed by European leaders, writes Bloomberg. European banks would need about 80 billion euros in the next 6-9 months to finance their capital shortfalls, according to sources with access to the results of stress tests conducted by the European Banking Authority (EBA). EU estimates are well below those of the International Monetary Fund (IMF) which identified a “hole” of 200 billion euros in bank balance sheets arising from writedowns of bonds and the expectations of analysts, who appreciated that banks would need a 275 billion recapitalization, writes Financial Times.
The injection of 80 billion euros in the banking sector would allow creditors to temporarily increase the rate of the Core Tier 1 capital in relation to risk weighted assets of 9%, a main measure of financial stability over current requirements. The threshold of 9%, which could result in dozens of banks to raise a total of 275 billion euros, according to estimates by U.S. investment bank Morgan Stanley, is currently debated by national governments in Brussels.
Some of the key assumptions of politicians disputed the econometric model used in stress tests, including the number of banks, capital thresholds and marking to the market price of bonds. European officials argue that one of the reasons for the results different than the ones obtained by IMF is due to the way of market values used in calculation. The methodology thus favors large banks’ balance sheets from the strong economies as German lender Deutsche Bank considered by analysts as one of the credit institutions with the greatest need of capital, or the British banks.
The results of stress tests could calm British officials fearing that the credit institution Royal Bank of Scotland (RBS), partially nationalized, would urgently need to recapitalize.