European Banks Face Scrutiny

Confidence in the ability of European politicians to solve the euro-zone debt crisis gave way to a fresh round of uncertainty Thursday, with analysts presenting wildly differing estimates on how much new capital banks might need to withstand sovereign shocks.

Bank bosses also continued to resist any forced recapitalizations, with Deutsche Bank AG Chief Executive Josef Ackermann saying it isn't clear they will help solve the crisis. Heads of other major European banks, including France's Société Générale SA, BNP Paribas SA and the U.K.'s Barclays PLC, have already argued that they can bolster their capital ratios through asset sales, retained earnings and by reducing capital-intensive assets and activities.

European Commission President Jose Manuel Barroso on Wednesday told the European parliament that member governments, the European Central Bank and the European Commission must coordinate efforts to recapitalize banks through private and state injections and introduce temporary, higher capital requirements, but failed to give specific details. EU finance ministers are due to meet Oct. 23 to discuss potential recapitalizations and other measures to address the sovereign-debt crisis.

With no official word on how much capital banks might be asked to hold, analysts studied various scenarios requiring anything from €10 billion ($13.79 billion) to more than €400 billion in new funds to be raised across the sector, leaving investors in the dark on what to expect.

The European Banking Authority in charge of assessing banks' health through stress tests requested new data from banks this week on their capital and sovereign holdings at June 30, but it isn't clear if a new minimum capital ratio might be set for banks to meet based on the updated information. Tests conducted in July required banks to hold a minimum of 5% core Tier 1 capital against risk-weighted assets.

Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively. Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario, which has been bandied about in press reports but not officially recognized by any EU authority.

Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector. Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

read more: Olympus Wealth Management