European banks to undergo tougher stress tests, but pass marks not set

European regulators are to apply stricter capital rules in the next round of bank stress tests, the European Banking Authority (EBA) said. However, it has not yet agreed on an exact "pass" mark for financial institutions.

The authority said yesterday that the stress tests it would  undertake between March and June would factor in the possibility of economic scenarios of greater severity than the failed 2010 tests.

The EBA has, however, confirmed that this year's tests would be based on  "core" Tier 1 capital, a benchmark comprising shareholders' capital and retained earnings.

The tests conducted last year by the Committee of European Banking Supervisors (CEBS), the EBA's predecessor, used the less strict Tier 1 threshold.

This is a broad measure of a bank's resilience, but lenders can make available the type of capital with lower quality assets that do not accurately reflect the amount of cash available to the bank.

The EBA has, however, not said which banks would be included in the 2011 stress tests, which are to be administered to a sample of about 90 European banks that hold between them 65 per cent of total EU banking assets.