BRUSSELS/FRANKFURT (Reuters) - European banks will have to show they have a high-quality capital ratio of 5 percent in order to pass regional stress tests, but regulators have not yet agreed how that capital will be defined, sources said.
A spokesman for the European Commission said on Friday that the European Banking Authority (EBA) would require a minimum so-called Core Tier 1 capital ratio of 5 percent.
Core Tier 1 is the most stringent indicator of a bank’s financial health and shows how well it would cope with writedowns on bad loans, for example.
According to three people familiar with the matter, the EBA will likely tell banks on Monday how it is to define the capital in its test, with publication perhaps as soon as next week.
So far the EBA has yet neither confirmed the pass mark for the checks nor what it will allow to count as Core Tier 1 ratio.
The EBA had no comment on Friday.
If the 5 percent mark were confirmed as the hurdle to be applied in an adverse economic scenario, it would fall short of the 6 percent level that was imposed on Irish banks this week.
“The target capital levels (in the Irish stress tests) are higher than what is currently foreseen in the European Banking Authority test,” the spokesman for the European Commission said.
The EU executive’s financial services commissioner Michel Barnier, who is working closely with the EBA, said he is confident about the EU tests, which should be seen as part of a raft of measures to improve banking stability, such as resolution mechanisms and better corporate governance.
“What matters for us is that the robustness and the credibility of the test get better and better, year after year,” Barnier told reporters during a visit to London.
“I am confident in the credibility of this new wave of stress tests. We will draw lessons from these tests and continue to improve them,” Barnier added after a meeting with the London-based EBA.
The Irish tests were done in the specific context of a wider restructuring program under the EU and International Monetary Fund, he said.
The EBA, Europe’s new banking watchdog, has said it will apply a stricter capital definition to this year’s tests in order to make them more credible, after last year’s exercise flopped and left investors still worried about which lenders would be able to withstand further economic shocks.
Regulators recently agreed on a deal to allow some controversial debt-equity holdings to count as core capital in the next round of stress tests, clearing the way for some ailing German banks to pass the assessment.
Countries have been lobbying behind the scenes for the EBA to include elements that would ease the task for domestic banks involved in the health-check.
The EBA is also reviewing how banks apply EU curbs introduced in January to crack down on excessive bank bonuses. Barnier said his appeal for moderation has not been heard and some of the bonuses awarded could not be justified.
“We are ready to go further,” Barnier said, declining to elaborate on his ideas.
Any tougher measures would stop short of capping bonuses and would be led by member states, he indicated.
“I want to speak to the banks about it. There are excessive bonuses being paid out in several countries,” Barnier said. FACTBOX-Details of Europe’s bank stress test
(Reporting by John O’Donnell in Brussels, Alexander Huebner, Philipp Halstrick, Arno Schuetze in Frankfurt, Huw Jones in London)
Editing by Sophie Walker and Gerald E. McCormick