DealBook: Stress Test Reveals European Banks Need More Capital

European regulators told many of the region’s biggest banks, including Deutsche Bank and Commerzbank, on Thursday to raise more capital, as signs mount that the European sovereign debt crisis may worsen.

With the region’s leaders gathering in Brussels in their latest bid to shore up the euro, the European Banking Authority announced that banks over all needed to raise 114.7 billion euros, or $152.7 billion, in the event the debt crisis is not resolved soon. That was more than estimate of 106 billion euros in October.

The banking authority’s assessment showed that banks in Germany, Italy and Spain would have to raise more capital than previously thought, while banks in France had all they needed. In all, the stress tests showed that 31 of 71 banks needed stronger reserves.

Bank shares took a hit on Thursday. Commerzbank was 9.5 percent; Deutsche Bank, off 4.3 percent; and Unicredit, down 7.2 percent.

The banking authority came under fire earlier this year for conducting tests in which it did not consider the possibility that a euro-zone country might default. Bowing to pressure, the latest test took into account potential losses on the vast amounts of bonds banks hold from troubled European governments.

American banks hold smaller amounts of European sovereign debt. But the Federal Reserve is also planning new tests to gauge the ability of banks in the United States to weather with any further deterioration in Europe, which is also on the cusp of a recession.

The crisis has become a looming concern for President Obama, who has warned it could impact the country’s economic recovery. The Treasury secretary, Timothy F. Geithner, visited several European capitals this week, urging leaders to address the debt crisis more urgently.

The banking authority’s test results came after the European Central Bank unveiled new support for Europe’s banks, which have been having trouble getting other financial institutions to lend them money amid an erosion of confidence. More European banks have had to rush to borrow from the central bank recently to help finance their operations, a process the E.C.B. said it would now make easier.

With their financing squeezed, some banks could face trouble raising new capital. Already, BNP Paribas, Société Générale, Commerzbank and other giants have said they would sell assets to raise new money. A number of banks have claimed that the capital requirements would force them to cut lending to businesses and consumers — a step that would further depress Europe’s teetering economy.

Mario Draghi, the president of the E.C.B., expressed concern Thursday that the tougher standards for banks could prompt them to stop making loans, creating a credit crunch.

While the additional capital ‘‘should improve the euro-area banking sector’s resilience over the medium term,’’ he said at a news conference, ‘‘it is essential that national supervisors ensure that the implementation of banks’ recapitalization plans does not result in developments that are detrimental to the financing of economic activity in the euro area.’’

In response to fears that banks will curtail lending, regulators expanded the definition of reserves to include so-called contingent capital, which is borrowed money that automatically converts to equity in a crisis. That concession should make it easier for banks to meet the requirements.

Banks are also restructuring their debt to bolster their reserves. Some financial firms are buying back or exchanging hybrid securities, in a complex maneuver that allows them to improve their capital levels without raising additional money.

‘‘There’s no magic bullet to this problem,’’ said Karl Goggin, a banking analyst at NCB Stockbrokers in Dublin. He said banks had three options to raise capital: tap private investors, sell assets or turn to their government.

‘‘Most will turn to the first two options, but some will have to consider state aid,’’ he said.

The test of 71 banks revealed new problems in Germany, where banks will have to raise new capital totaling 13.1 billion euros, more than twice the amount thought just a month ago. Deutsche Bank, the country’s largest lender, will need to raise 3.2 billion euros, while Commerzbank must increase its reserves by 5.3 billion euros.

The German Finance Ministry said Wednesday it planned to propose legislation to revive the government fund it used in 2008 to rescue banks to help banks increase their reserves. In a break from previous practice, the government will be able to force banks to accept aid.

Banks in Spain must raise 26.2 billion euros. The nation’s banking giants, including Grupo Santander, are looking to assets sales to supplement their capital. The banking authority has said Italian banks must raise 15.4 billion euros.

For years, banks in Europe and the United States loaded up on the bonds of euro-zone governments. Regulators encouraged banks to buy more by deeming the bonds risk free, based on the assumption that no sovereign nation in the 17-member euro monetary union would ever default.

The banking authority’s assessment on Thursday underscored how those assumptions had been shattered, especially as the sovereign crisis swirls to Italy and larger countries.

‘‘As sovereigns go, so the banks will go,’’ said Gary Jenkins, a strategist at Evolution Securities in London. ‘‘If the sovereign situation deteriorates, the entire banking sector will deteriorate with it very quickly.’’

Jack Ewing contributed reporting from Frankfurt, and Julia Werdigier and Mark Scott from London.

Article source: http://dealbook.nytimes.com/2011/12/08/stress-test-reveal-european-banks-need-more-capital/?partner=rss&emc=rss