Brussels (Reuters)-Governments are ready to save the banks cannot raise capital from investors after the details the 15 July, EU as lenders have failed its most recent, more vigorous, stress test.
The European banking authority announced on Friday the publication date for the results of its control over 91 of top service providers in the region. These will be accompanied by measures to strengthen the capital for those that failed or almost succeeded, in another attempt to reassure investors that the European banks can withstand future crises.
A separate EU draft document seen by Reuters, European countries will support banks fail stress tests if the banks cannot raise capital from investors within six months.
The paper, in preparation for EU Finance Ministers to approve on Tuesday, is an about-face from the G20 promises by politicians in the wake of the financial crisis that taxpayers would never again bailout the banks.
However, the EBA seemed to give banks a longer period. It said in a statement that would reveal next week how they will plug gaps capital by the end of 2012, giving them more markets had taken to raise the new capital.
This latest round of testing was presented as being more stringent than previous attempts, when some banks failed, and officials of the Finance Ministers are designing plans for how to deal with the fallout.
The document also says that most lenders fail the test will be put on a watchlist critic if they deteriorate further. Until the end of September will be given banks that fail to develop a plan to mend their finances and then three months to implement it.
Sources close to the banks and watchdogs said that all German banks were certain they would get the green light, although some lenders, including the Landesbanks HSH Nordbank land and NordLB, would just scrape.
News that EU governments are serious about supporting banks that fail to maintain the core capital of 5 per cent across different markets shock theory raised and UK Gilts futures Bund.
"In essence that puts even more pressure on the periphery (eurozone) to come up with measures, not only to shore up their budgets, but to support their banking sectors, which can afford to do," said Marc Ostwald, strategist at monument titles.
"It's basically a security charge on the back of this. This is a market that is living in mortal fear of anything to do with the euro area and anything that puts the banking sector under stress, "said Ostwald.
The yield on German 10-year English/spread the euro hit fresh highs had expressed fears that stretched already tax countries such as Italy would have to dig into their pockets to rescue banks that do not test as well.
Shares in Italian Bank UniCredit fell more than 5 percent on fears that Italy could be pulled into the debt crisis that has already forced, Greece, Ireland and Portugal to take the bailouts. UniCredit is the only major Italian bank which has not yet announced a capital increase.
Italian Banking Association Chief Giuseppe Mussari, when asked about possible government intervention for banks to have failed the stress test, said that this was not a problem for the Italian banks.
FIRST PRIVATE SECTOR
According to the draft EU document, capital-raising plans before should be based on "measures, including ... ... earnings raise additional common equity or quality hybrid instruments by private investors, sales of assets, mergers."
But if the search of private capital leads nowhere, then Governments should be prepared to intervene.
Officials, however, provide for "the extreme case of" if efforts to rehabilitate a bank fail and threatens the stability of the wider, recommending "orderly restructuring process and resolution".
The number of banks said the EBA have failed or will encourage investors that Europe now is coming clean with its banking problems, or if the evidence is considered too lax once again, it will hurt already battered credibility of the EU.
Previous stress tests have been widely rejected as too lax-all Irish banks passed last year to test a few months before the European Union and International Monetary Fund and had them outside the country.
END OF SEPTEMBER
In the draft document, dated July 7, officials say that banks that Miss the mark of 5 per cent capital step will be given until the end of September at the latest to submit plans for recapitalisation, with another three months to implement the measures. "
"If the relevant banks are able to implement a credible plan within the deadlines specified capital, (the Government) is ready to take the necessary measures to maintain financial stability," officials write in document seen by Reuters.
New controls will measure how well the core capital that banks rely on to absorb losses, as unpaid loans can hold up when exposed to an economic dip or fall in property prices.
They also assess the impact on banks should possess, bonds issued by countries like Greece, lose value.
Those banks that are dangerously close to the threshold of 5 per cent will also be identified for special attention.
"The banks where the (core tier 1) ratio is above, but close to 5 percent benchmark scenario stress will be subject to reinforced prudential supervision to ensure that there are no unexpected deterioration in their position of capital".
(Additional reporting by Ana See da Costa and Huw Jones in London; writing by Sophie Walker; Edited by will Smith) and Alexander Waterman
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