VIENNA, April 7 European bank stress tests will combine "very conservative" definitions of what counts as capital and "maximum disclosure" to let investors get a clear view of lenders' health, the EU's top bank supervisor said.
Andrea Enria, chairman of the new European Banking Authority (EBA), declined to give specifics before criteria of the new tests emerge on Friday but told reporters he was confident the tests would be more convincing than last year's version.
Markets are keen to know how EBA will define the capital used in its calculations of banks' Core Tier 1 ratios -- the most stringent indicator of how well they can absorb shocks -- and what passing grade to assign.
"We want to ensure consistency throughout Europe. It is difficult but we think we have made a lot of progress on that, at least in the part of the instruments that is going into capital," he said late on Wednesday in remarks for release on Thursday.
"It is a tough definition...It is a definition that eventually will not be far away from what will be Basel III (capital adequacy rules) in the first months of implementation in 2013. Actually my perception is that it will be a bit tougher than that."
A senior regulatory source has said he expected the pass mark to be 5 percent of risk-weighted assets under the stressed scenario.
The EBA's deputy head said on Wednesday that the tests would gauge how much capital banks would require if the EU economy grew 4 percentage points slower than expected.
The test results, due to be published in June, will shine bright sunlight into banks' books so that investors can judge just how robust individual lenders are.
"We will do the maximum disclosure. We will give all the positions book by book, trading book, available for sale, held to maturity, broken down by country of the counterpart, broken down by maturity -- which was not there last year -- so everybody will have all the information to assess the information in the way they like," Enria said.
He said even if banks had to deal with a sovereign debt restructuring it would not be a major problem.
"I don't think it is our task as supervisors to attach probabilities to restructuring debt in some countries, but even if there is a restructuring tomorrow this will not come in a single year," he said.
There will be rescheduling, there will be lengthening of maturities, and this will allow banks to work this out through five, six, ten years in their books."
Enria declined to comment on the situation in Germany, where officials have been pushing to allow some controversial debt-equity hybrid instruments to count as core capital in the next round of stress tests. [ID:nLDE72O0GN]
He stressed only that banks needed high-quality capital and that ultimately EU legislation would determine what is allowed.
"What I can tell you is that from my experience we cannot live any more in a Europe with 27 different definitions of capital. This is unacceptable," he said.
Europe's new banking watchdog has said it will apply a stricter capital definition after last year's exercise flopped and left investors worried about which lenders would be able to withstand further economic shocks.
In 2010 only seven banks failed, and all of Ireland's banks passed despite subsequently needing a massive bailout. (Reporting by Michael Shields; editing by Patrick Graham)