The scale of European bank recapitalizion is going to be far smaller than anyone was hoping for.
The FT is reporting that sources close to the EBA’s new stress tests are talking €70-90 billion, rather than the €200-275 that analysts and IMF Managing Director Christine Lagarde have suggesed.
According to the report, €40-50 billion of that recapitalization will happen in Italy and Spain, with smaller sums to be spread out across banks in the periphery.
It would appear that banks were not forced to plan for the possibility of a default in the stress tests, and will now merely be required to maintain the more stingent 9% Tier 1 capital.
This rumour admittedly packs a lot less punch than a report yesterday that France and Germany had reached an agreement on levering the EFSF.
However, bank recapitalization will play a major role in bolstering confidence in the struggling EU banking system, particularly if banks are going to see bigger haircuts on their Greek sovereign debt.