FRANKFURT — Banks that fail a planned health checkup by European regulators in June will be required to present a recovery plan that could force some weaker institutions, particularly in Germany, to raise more capital or even wind down their operations, according to documents released Friday.
The European Banking Authority released more details of how it will conduct the so-called stress tests of 90 of Europe’s largest banks. The rules appear to create a problem for some German landesbanks by disqualifying a portion of the funds they now use to meet regulations on capital reserves.
The authority said in a statement Friday that it expected any bank “showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time.”
The stress tests have become a heated political issue in Germany because they threaten to impose unpleasant choices on the state governments and local savings banks that typically share ownership in the landesbanks. The economics minister of the state of Hessen, Dieter Posch, said this week that the state’s landesbank, Helaba, should boycott the stress test, which it is likely to fail.
It is not up to banks, however, whether to participate or not, officials said. While banks can opt not to disclose the results of their tests to the general public, they must give information to regulators as part of the stress tests and would be required to take action if they failed.
While political leaders and representatives of the landesbanks have complained about the stress tests, many economists have said that pressure is needed to force the banks to rebuild their capital reserves and avoid the risk of another financial crisis.
The banking authority said Friday that, to pass the stress tests, banks must have a capital cushion equal to 5 percent of assets. Banks had been waiting for the E.B.A. to disclose how it will define the cushion, known as core tier 1 equity and considered the most durable form of reserves.
The European Banking Authority, which is under pressure to make the tests more rigorous and credible than a similar exercise last year, said Friday that emergency government aid would still qualify as core capital.
Commerzbank, a commercial lender in Frankfurt, is among banks that received billions in capital from the German government. But the bank already said this week that it would issue new shares and take other measures to repay the aid and bolsters its capital reserves.
The E.B.A. definition appeared to exclude so-called silent participations by other shareholders, such as the savings banks who provide a significant amount of the funds that many landesbanks use to meet capital requirements. The definition would also exclude silent participations by state governments that were not part of an emergency bailout.
“Naturally silent participations are important to banks that do not have access to the market,” said Dominik Lamminger, a spokesman for the Association of German Public Sector Banks, which represents the landesbanks.
The association has maintained that German landesbanks would pass the stress tests, but it argued that it was unfair to hold the banks to a standard not yet required by law.
It appeared that the planned stress tests were already prompting some landesbanks to take action. The state of Lower Saxony will convert silent participations worth €1.2 billion, or $1.68 billion, in NordLB, a landesbank based in Hanover, into ordinary shares, the newspaper Handelsblatt reported. Ordinary shares would count toward core capital for purposes of the stress test.
NordLB could not immediately be reached for comment.
