European Banking Authority
A general view of the Caixa Terrassa headquarters (part of Unnim) bank in central Terrassa July 16, 2011. The European Banking Authority (EBA) says 8 banks of 90 failed stress test. The banks need to raise 2.5 billion euros in capital, the EBA said. Five Spanish banks, two Greek banks and one Austrian bank failed the test. REUTERS/Albert Gea

FRANKFURT -- 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 7 percent under a recession scenario, and those who fail will be asked to bolster their capital position, two banking sources told Reuters.

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.

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 (NBGr.AT: Quote, Profile, Research, Stock Buzz), Eurobank (EFGr.AT: Quote, Profile, Research, Stock Buzz) and the other four top lenders could need over 30 billion euros under the tougher scenario.

Based on the end-2010 data, used in the most recent stress tests, other banks that would need capital include Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Commerzbank (CBKG.DE: Quote, Profile, Research, Stock Buzz), Societe Generale (SOGN.PA: Quote, Profile, Research, Stock Buzz), Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) and Unicredit (CRDI.MI: Quote, Profile, Research, Stock Buzz).

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 2.5, 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.

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 (DEXI.BR: Quote, Profile, Research, Stock Buzz), which comfortably passed the July health check.

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.

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.

($1 = 0.732 Euros)

(Additional reporting by Edward Taylor, Steve Slater and Huw Jones; Editing by David Holmes, Helen Massy-Beresford and Alexander Smith)