Europe will tell its banks today how much capital they need to hold to withstand a two-year recession, as financial watchdogs seek to repair the sector's tattered image in the eyes of investors.
The European Banking Authority (EBA) will name the 90 or so banks that need to undergo a stress test exercise, which will determine which of them need to raise capital to bolster their defences against economic headwinds.
The EBA, keen to be seen as tough after last year's tests flopped, will determine the level of core capital that the banks need to have left on their books when put under the adverse economic scenarios.
The regulator, running the stress tests for a third time since the financial crisis unfolded, will also spell out the quality of capital eligible for inclusion in the process, the results of which are due in June.
Last week the European Commission said banks will need to keep core Tier 1 capital above 5% to pass the tests, which will also include tumbling property prices.
Banks must hold a minimum of 7% capital at all times under new global capital rules known as Basel III, from January 2013, though countries such as Britain and Switzerland have already put the bar at 10% or more.
The EBA health check is aimed at drawing a line under the bloc's banking problems and is already having an impact.
Banks are bolstering capital ahead of the test and plans unveiled by the end of this month can be included in the health check. Even though few banks are expected to fail, being close to failing could prompt weak banks to raise capital.
Germany's Commerzbank AG, along with Italy's Intesa Sanpaolo and Banca Monte dei Paschi di Siena SpA, this week unveiled plans to increase their capital cushions.
Europe's listed banks are expected to raise at least 40 billion euros this year and Spain's private savings banks, or cajas, will raise a similar amount, according to a majority of investors polled at a top conference last month.
Fewer than 10 banks are expected to fail the EBA stress test according to more than four-fifths of the 800 investors polled by investment bank Morgan Stanley.
However banks seen in the "near pass" region are likely to come under pressure to raise cash or see their shares discounted in comparison to rivals who have built capital up to robust levels.
Portugal's economic troubles have raised fears the capital level of its banks will be eroded by low economic growth and rising bad debts, and need bolstering.
EBA Chairman Andrea Enria said this week only top quality capital can be counted in a bank's core Tier 1 ratio, the most stringent measure of stability.
German banks are keen to see if the EBA accepts the inclusion of "silent participations", a hybrid debt-equity instrument used widely by local regulators, but which critics say may not absorb losses under stress.
(EURACTIV with Reuters.)