European banks have a capital shortfall of as much as €767bn, a study suggests, as the ECB probes the financial health of the region’s lenders.
French banks show the biggest gap of €285bn, followed by German lenders with as much as €199bn, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study. The figures assume a benchmark capital ratio for other book measures of leverage of 7%, they wrote.
“A comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks,” the authors wrote, referring to the ECB’s asset quality review stage of the comprehensive assessment.
The ECB is conducting a three-stage assessment of bank assets before it assumes oversight of about 130 lenders across the currency bloc from November.
Spanish banks have a shortfall of €92bn, while Italian banks lack €45bn, the study showed.
“Our results suggest that with common equity issuance and haircuts on subordinated creditors, it should be possible to deal with many banks’ capital needs,” the authors wrote.
“Some will, however, require public backstops, especially if bail-ins are difficult to implement without imposing losses on bondholders, who may themselves be other banks and systemically important financial institutions.”
The banking sectors in Belgium, Cyprus, and Greece “seem likely to require backstops”, they said.
More in this section