Q&A: How is Europe forcing banks to recapitalize?

LONDON (Reuters) - Europe's banks face a capital shortfall worth hundreds of billions of euros as Europe struggles to find a way out of its spiraling debt crisis.

The EU's executive European Commission said on Friday that 420 billion euros of capital have already been injected into the bloc's banks since 2008.

DIDN'T THE STRESS TEST DEAL WITH ALL THIS?

Eight banks failed the European Union test of 90 lenders in July and must raise 2.5 billion euros by the end of this year.

Banks that narrowly passed the stress test with a core capital ratio of only just above 5 percent and significant exposure to sovereign debt in troubled euro zone countries, have until April 15, 2012, to recapitalise.

Sixteen banks were in the 5-6 percent band and a Reuters calculator shows that in July they needed to raise 8.2 billion euros. r.reuters.com/fut62s

The European Banking Authority, which is monitoring implementation, said on Thursday this agreed recapitalisation timetable remains unchanged.

PROBLEM SOLVED THEN?

Up to a point. All those that failed or just passed are largely national, mid-tier firms that are not seen as systemically important on a European or global scale.

It's debatable whether investors would flock back to the sector if all the banks that failed or just passed the stress test were fully recapitalized today.

Markets are more concerned that big cross-border banks like BNP Paribas and Societe Generale of France and UniCredit of Italy, which passed the stress test, should bump up their capital levels.

WHY DO MARKETS TALK ABOUT HAIRCUTS?

Some of these big banks have large holdings of Greek and other troubled euro zone debt which analysts say have not been written down adequately to reflect discounted prices.

Using a Reuters calculator to apply current market discounts to government bonds of Greece, Italy, Spain, Portugal and Ireland and then apply the July stress test again, 18 out of the 90 banks would have failed and shown a combined capital shortfall of 24.6 billion euros. r.reuters.com/buw83s

The International Monetary Fund said this week European banks face up to 300 billion-euro exposure from declining values of euro zone debt. The IMF describes its figure as the risk exposure of banks due to falls in sovereign debt prices, rises in bank funding costs and a decline in bank asset prices.

Deutsche Bank signaled on Friday that banks may have to make bigger writedowns on Greek debt holdings.

WHY WON'T SUPERVISORS SPEED UP THINGS?

Behind the scenes supervisors are putting pressure on banks to cut bonuses, defer share buybacks and scrap dividends so that profits are used to top up capital levels.

The European Systemic Risk Board (ESRB), chaired by the European Central Bank, said this week supervisors should "coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures."

The ESRB said the EU's new fiscal lifeboat, the European Financial Stability Facility (EFSF), could lend to governments to recapitalise banks, including those not in Portugal, Greece or Ireland, the countries already being bailed out by the EU.

EU leaders want the EFSF running by the end of October but sceptics doubt its 440 billion euro cash pile will be enough to meet all potential demands. Policymakers also want banks to recapitalise with private money where at all possible.

WHAT ABOUT THOSE BASEL RULES?

All the EU's 8,000 banks must comply with the global Basel III financial regulation which demands a minimum core capital ratio of 7 percent be phased in between 2013 and end-2018.

Markets and regulators are already putting pressure on banks to move earlier. Britain's banks have core capital ratios of 10 percent or more. The Bank of Spain said on Friday all domestic lenders will have core ratios of 8-10 percent by the end of next week.

The Basel Committee of global regulators is due to finalize plans next Tuesday and Wednesday for the world's 28 biggest banks -- many from the EU -- to hold up to 2.5 percent of capital on top of the Basel III minimum, to be phased in from the start of 2016 to the end of 2018.

Once G20 leaders have given the plans final approval in November, markets will expect these top banks, which will be named by year end, to begin complying sooner rather than later.

(Reporting by Huw Jones; Editing by Sophie Walker)