Strict capital test in store for European banks

Banks in Europe could be about to be hit with a strict capital test in the form of a quick-fire regulatory health check.

Reuters reports that the lenders will be required to achieve a considerably firmer capital position and may also need to generate around €100 billion ($137 billion).

Regulatory and industry sources told the news agency that the European Banking Authority - which officially came into being at the beginning of 2011 - would like to see financial institutions holding a minimum core Tier One ratio of at least seven per cent with regards to a recession scenario.

Furthermore, banks who are unable to show evidence of such movement will be instructed to significantly improve their capital position.

One of the sources told the news provider: "A significant number of banks are expected to fail the stress tests."

Lenders will be required to make their capital levels known by the end of June 2012, while their sovereign debt exposures must be detailed come the end of September.

By Asim Shah