European regulators call on banks to raise capital

European regulators yesterday told many of the region's biggest banks, including Deutsche Bank and Commerzbank, to raise more capital as developments signalled that the European sovereign debt crisis might worsen.

As the region's leaders gathered in Brussels in their latest bid to shore up the euro, the European Banking Authority announced that over all, banks needed to raise €114.7 billion in case no resolution to the debt crisis was found soon. The new figure is higher than the October estimate of €106 billion.

According to the banking authority's assessment, banks in Germany, Italy and Spain would need to raise more capital than earlier estimated, even as banks in France held all they  needed. Overall, the stress tests revealed that 31 of 71 banks needed stronger reserves.

Meanwhile, bank shares were hammered yesterday with  Commerzbank down 9.5 per cent, Deutsche Bank 4.3 per cent and UniCredit 7.2 per cent.

The banking authority came under fire for conducting tests that failed to account for the possibility that one of the 17 countries using the euro might default. Under pressure, in the latest tests the regulators factored in potential losses on the vast amounts of bonds issued by troubled European governments that were held by banks.

Though American banks hold smaller amounts of European sovereign debt, the Federal Reserve is also planning to add new tests to measure the ability of banks in the US to weather any further deterioration in Europe, which appears to be on the brink of recession.