ECB eyes 6% capital retention

The European Central Bank favours requiring banks to show they can retain capital worth 6% of their assets when it puts them through a simulated recession later this year, said two euro-area officials with knowledge of the matter.

A majority of policy makers and technical officials have reached consensus on the benchmark for the ECB’s stress test, the officials said, asking not to be identified as the deliberations aren’t public.

The threshold must still be agreed on with the European Banking Authority (EBA) that coordinates the exams, and a small number of countries wanting an easier benchmark may press for a compromise lower than 6% , one of the officials said.

A benchmark of 6% would be tougher than the 5% set by the London-based EBA in 2011, when tests failed to spot shortcomings at banks that later collapsed.

Policymakers say they’re determined to convince investors that their health check of institutions is thorough and credible as the ECB prepares to take over supervision of about 130 euro-area lenders, from France’s BNP Paribas SA to Bank of Valetta Plc in Malta.

The ECB will become a full member of the EBA when it starts supervising eurozone lenders this year.

If the ECB determines the fictional recession would push a bank’s capital as a percentage of its risk-weighted assets below 6%, the lender would be required to raise capital.

For the rest of the ECB’s bank balance-sheet review, known as the Comprehensive Assessment, the central bank is using a minimum capital requirement of 8% to evaluate lenders’ health under current conditions.

ECB president Mario Draghi said in October that officials won’t shy away from declaring banks have failed the stress test.

“Banks do need to fail” to prove the credibility of the exercise, Draghi said in a Bloomberg Television interview. “If they do have to fail, they have to fail. There’s no question about that.”

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