European Union regulators want banks to restructure so they can wean themselves off cheap central bank loans and attract their own funding from investors and markets.
Europe's debt crisis has hurt many banks' ability to raise money, leaving them no choice but to stock up at two recent exceptional European Central Bank auctions. Spanish and Italian banks are thought to have been among the largest borrowers.
The European Banking Authority (EBA) wants banks to stand on their own feet again and at its board meeting on April 3 and 4 will try and come up with ways to encourage them to do so.
EBA Chairman Andrea Enria said that many banks were ready to pro-actively tackle problem assets, refocus business models and gradually cut dependence on ECB money.
The EBA is discussing possible policy actions, which could accompany this process of deleveraging and restructuring to ensure it develops in an orderly and measured way allowing banks to maintain orderly provision of credit to the real economy, he said in a paper presented to EU finance ministers last week.
Regulators want banks to replace short-term funding with longer maturities to avoid the frequent scramble to tap investors. This would also help banks prepare for deep scrutiny of their business models in new stress tests next year.
The EBA will also be checking this week to see whether 31 banks identified as having a combined 115 billion euro capital hole in stress tests last year are on track to plug the gap by June 30.
Enria said last week the recapitalization plan was largely on track but some lenders were using overly optimistic assumptions of how they will raise new capital.
In a very few cases, the EBA is continuing work with national authorities to ensure plans are finalised, and additional back up measures are considered, according to the paper, a copy of which was obtained by Reuters.
Italy's Monte dei Paschi
The bank's director general Fabrizio Viola said last week it would reduce a 3.3 billion euro capital shortfall by roughly a third by converting hybrid notes into equity. Italian press reports said on Sunday the bank will also slash its holdings of government debt and close 150 branches.
Some Italian banks want the EBA to row back on its capital and sovereign debt buffer requirements, citing an easing of tensions in sovereign debt markets after the ECB's two three year loan auctions.
Bank of Italy governor Ignazio Visco said on Saturday the ECB could eventually relax the capital buffers.
But he said it was a medium-term prospect and the EBA is not expected to take such action at this meeting.
Spanish banks are also in the spotlight, with many hurting from a property crash and worsening economy, and some economists saying they may need more public cash.
In case some lenders cannot make the June deadline, Enria has proposed that the EU's new financial lifeboat, the European Stability Mechanism (ESM), could directly inject money into struggling lenders from July.
He believes this would also help break the link between banks and the euro zone sovereign debt crisis but so far the ESM is limited to bailing out countries.
The EBA board will also review a survey of how banks have complied with the watchdog's bank bonus curbs introduced in January 2011.
The supervisors at set to approve launching a consultation on draft rules for defining bank capital as they flesh out an EU reform to implement the Basel III global bank capital accord from 2013.
The EBA is expected to publish the review of bonus curbs and the bank capital consultation after Easter.
(Additional reporting by John O'Donnell in Copenhagen, Silvia Aloisi in Milan and Sonya Dowsett in Madrid; editing by Anna Willard)