Europe's banks will have to achieve a significantly stronger capital position under a quick-fire regulatory health check and may need to raise some 100 billion euros ($137 billion), banking and regulatory sources said on Tuesday.
The European Banking Authority (EBA) wants banks to hold a minimum core Tier One ratio of at least 7 percent under a recession scenario, and those who fail will be told to bolster their capital position, two banking sources told Reuters.
Other sources with knowledge of the process said no final decision has been taken on the pass mark, with some citing a range of 7-10 percent. Talks also continue on a definition of the capital that can be included -- an element that proved divisive in the EBA's last test in July.
The data was requested on Friday and banks have been asked to submit it by the end of Tuesday, three sources said. The data is based on the end of June.
A significant number of banks are expected to fail the stress tests, one of these sources said.
The form banks must fill out, obtained by Reuters, showed they must notify capital levels as of the end of June, along with end of September sovereign debt exposures.
EU policymakers will use the data to determine how some banks must recapitalize in a bid to restore confidence in the battered sector.
Meanwhile, Jose Manuel Barroso, president of the European Union's executive European Commission, said he will propose a bank recapitalization plan on Wednesday even though there is no agreement yet on where the money will come from.
A stress test of 90 banks run by the EBA this summer was criticized for not being tough enough. It required core capital of 5 percent to be held, but did not apply severe losses on holdings of Greek and other sovereign debt. The current test is expected to mark peripheral euro zone debt to market prices.
Using a 7 percent pass mark, previous stress test data, and current market prices for sovereign bonds, some 48 banks would fail the test and need to raise a total of 99 billion euros, according to Reuters Breakingviews data. Only eight banks had failed the test in July.
Greek banks would be hardest hit and National Bank of Greece
Based on the end-2010 data, used in the most recent stress tests, other banks that would need capital include Royal Bank of Scotland
Some of that data changed significantly in the first half of the year, however, and some banks have complained that methodology in the past test was flawed and should be changed.
Deutsche Bank, for example, has cut its sovereign holdings and been profitable, and will be above the higher pass mark, a senior source close to the bank said. Similarly, RBS said in July that including a big de-risking of its loan book would have lifted its stressed capital ratio over 7 percent.
It remains unclear whether capital that qualifies as core Tier One will be defined according to rules known as Basel III, or whether a more lenient earlier version, known as Basel II, will be applied, the sources said.
The EBA said it had asked for updated data on capital and sovereign exposures, but refused to provide further details.
A higher level of capital will reduce the probability of default of the banks and their funding costs, EBA Chairman Andrea Enria told the European Parliament on Tuesday.
Euro zone leaders have stepped up plans to bolster bank capital as part of a wider rescue package, which was given greater impetus by this week's rescue of Belgian-French lender Dexia
Risks from the sovereign debt crisis are increasing rapidly and have put Europe's banks in the danger zone, Jean-Claude Trichet, the head of Europe's central bank and its watchdog on financial stability, said on Tuesday.
Over the past three weeks, the situation has continued to be very demanding. The crisis is systemic and must be tackled decisively, Trichet said. [ID:nL5E7LB1OZ]
The concerns have prompted leaders to ask the EBA to carry out its swift revised stress test so it can better assess potential trouble spots.
Trichet called for a clear decision on recapitalizing banks, saying there was no time to lose. The IMF has estimated eurozone banks could need 200 billion euros, and analysts reckon a comprehensive plan could require even more.
The leaders of Germany and France on Sunday promised a plan soon to recapitalize Europe's banks, but gave no details.
There remain disagreements on how a rescue effort would be funded, however.
Berlin wants private sector investors to be called on first and believes national governments should then step in if needed, leaving the euro zone's 440 billion euro European Financial Stability Facility rescue fund for use as a last resort.
Paris wants an earlier use of the EFSF fund.
(Additional reporting by Edward Taylor, Steve Slater and Huw Jones in London, and John O'Donnell and Julien Toyer in Brussels; Editing by David Holmes, Helen Massy-Beresford and Alexander Smith)