The chairman of the new pan European banking regulator has mandated all EU members must put in place mechanisms for recapitalisation of troubled banks within the next three months.
Banks that fail the impending stress tests, to be conducted across the EU and results of which are due in June, should have plans in place to make up for the capital shortfall, said Andrea Ernia, chairman of the European Banking Authority.
“The backstops must be in place before the publication of the data (on stress tests)”, said Mr. Ernia. The ‘peripheral’ states of Spain, Greece and Ireland have the mechanisms in place already. Britain has also a mechanism in place, although its not part of the exercise.
Banks in Italy are among the most vulnerable ones as they will require substantial recapitalisation. Mr. Ernia’s native country has several smaller institutions those may collapse without intervention, analysts believe.
Mr. Ernia also argued in favour of a deadline for banks failing the stress tests for raising fresh capitals.
The US had conducted a similar exercise in 2009 under which it had given ten banks six months time to raise a combined fresh capital if $75 billion.
Last year, the EU had conducted similar but less rigorous tests and 7 out of 91 banks had failed the tests. However, in the absence of any follow-through by regulators, few banks took corrective measures to rectify the situation.
The tests will begin next month, following which peer review will take place.