U.S. Treasury Secretary Timothy Geithner will urge European officials this week to conduct some form of banking system stress tests, CNBC reported on Tuesday, citing an Obama administration official.
The stress tests, however, would have to differ from those conducted by U.S. regulators in the spring of 2009, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found, CNBC said.
Geithner and other Treasury officials routinely cite the U.S. stress tests, which helped open the door for private capital to return to the banking sector, as calming intense market turmoil caused by the financial crisis.
Similar tests could provide more transparency into the European banking sector's condition and help boost market confidence.
Worries over debt holdings of European banks has caused another big drop in bank shares this week after the Bank of Spain seized control of a small savings bank, CajaSur, also hitting the euro and European government bonds. Geithner believes that stress tests to ensure banks have adequate capital could similarly calm European markets, CNBC said.
U.S. Treasury officials had no immediate comment on the report.
Geithner, fresh from U.S.-China bilateral talks in Beijing, visits London on Wednesday to meet with new British Chancellor of the Exchequer George Osborne and will later meet with European Central Bank President Jean-Claude Trichet in Frankfurt and German Finance Minister Wolfgang Schaeuble in Berlin.
Europe Union finance ministers unveiled stress test results last October that were considered less strenuous, less extensive and less transparent than the U.S. test. The EU exercise found that European banks would be able to withstand a harsh recession and in a worst-case scenario, not one of the region's 22 most important banks would see its capital buffer slip into perilous territory.
In the U.S. stress tests on the 19 largest American banks, conducted by the Federal Reserve and other major bank regulators, 10 were determined to need bigger capital cushions and combined they raised more than $77 billion in new common equity. Only one, automotive and mortgage lender GMAC Financial Services, had to turn to the government for more capital.
The exercise tested banks against a more adverse scenario of unemployment averaging 8.9 percent in 2009 -- a level it significantly overshot-- and 10.3 percent in 2010. While unemployment now appears on track to be lower than the 2010 more adverse level it is likely to stay well above a baseline estimate of 8.8 percent.
(Reporting by David Lawder; Editing by Andrea Ricci)