European governments must put in place emergency bank recapitalization mechanisms within the next three months, according to the chairman of the new pan-European banking regulator.
Andrea Enria, chairman of the European Banking Authority, has told European finance ministers that he is determined that each country should be in a position to correct capital shortfalls at any banks that failed impending stress tests, whose results are due to be announced in late June.
“The backstops must be in place before the publication of the [stress test] data,” he said on Thursday. Spain, Ireland and Greece have such structures in place, as does the UK.
Germany did have a mechanism although it is being wound down. Several other countries, including Mr Enria’s native Italy, have yet to establish an appropriate body. Italy’s banks are among the weakest capitalized in Europe and analysts believe several smaller Italian institutions risk failing.
Mr Enria said it would be “sensible” to impose a deadline on banks that fail stress tests to raise fresh capital, although he did not specify how long it should be.
The 2009 US stress test process – generally seen as having set the standard for such exercises – gave 10 banks six months to raise a combined $75 billion.
Last year, although only seven out of 91 banks failed the test, there was little follow-through by regulators. Some banks that failed have yet to act to plug the capital weakness the exercise identified.
Mr Enria’s comments came before today’s communication of the EBA’s economic scenarios for its stress test, which confirm leaked information from last week.
By some measures, the tests are as weak, or weaker, than last year, although the regulator has been at pains to highlight some of the scenarios that have been strengthened. Those include tests for exposure to property for some countries such as the UK.
The tests are set to take place next month, with a month-long period of peer review.