European banks could get up to six months to strengthen their capital under plans aimed at halting the region's debt crisis, giving them time to raise funds privately in the hope of averting another damaging credit crunch.
EU officials said on Thursday that weak banks may get the extra time to bolster their balance sheets after a rapid health check currently underway.
Euro zone leaders are insisting that banks recapitalise, in an attempt to halt the euro zone crisis and shore up investor confidence.
"A three- to six-month deadline is being considered," said one EU official, speaking on condition of anonymity. "No decision has been taken."
The plan means Deutsche Bank and other top European banks could have to raise billions of euros to meet a 9 percent core capital target and withstand hefty losses on sovereign bonds.
The European Banking Authority, which is assessing banks' capital needs, is likely to mark down the value of banks' holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters.
Deutsche Bank, Germany's flagship lender, would need 9 billion euros in fresh equity to reach that level, two people with direct knowledge of the bank's finances said on Thursday.
Deutsche Bank declined to comment, but in separate remarks the bank's chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalisation and added it had enough funds of its own to cope with a crisis.
Setting the bar at 9 percent would leave European banks with a capital shortfall of about 260 billion euros, based on a two-year recession and applying current market prices to holdings of Greek, Irish, Italian, Portuguese and Spanish government bonds, according to Reuters Breakingviews data.
Royal Bank of Scotland , Unicredit , Deutsche Bank, BNP Paribas and Societe Generale would all need over 12 billion euros based on that data. Some 67 of 90 banks tested would need capital.
Banks are already attempting to sell assets and shrink their loan books to lift capital ratios. They could also be told to cut pay for staff and dividends for investors to preserve cash.
But that could force them to cut lending to companies and risk derailing economic recovery, bankers have warned.
"We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole," Ackermann said.
All banks will be looking to cut back on lending that uses a lot of capital and costly funding such as asset finance, unsecured consumer finance, trade finance and some business lending, analysts at Morgan Stanley said.
"The risks of a big credit squeeze are very real, and we hope the methodology and process looks to limit this," said Huw van Steenis, analyst at Morgan Stanley.
PRIVATE FUNDS... THEN TAXPAYERS
European officials said banks should first turn to private investors rather than governments to improve capital, signalling that they needed time to do this.
"The timeline is very important," said one official. "The current market circumstances are not ideal. At the same time, we need to (regain) confidence as soon as possible."
There is likely to be limited private funding available for banks, leaving many at risk of needing taxpayer funds or the new euro zone EFSF rescue fund as a last resort.
Greece's banks could have to raise over 30 billion euros under the plan, as they face big losses on their holdings of domestic bonds.
Banks are facing losses of 39 percent on their Greek bonds under a private sector rescue plan agreed in July, above the original estimate of a 21 percent hit, due to a rise in Greece's risk profile.
Greek banks could endure a loss of up to 30 percent on the bonds but could not stand significantly bigger haircuts, which would also hurt the economy, Greek banking sources said.
European leaders are still discussing the recapitalisation plans, with many details still subject to change, and face intense lobbying from banks and some countries who say it is too harsh. Proposals are expected to be presented to a meeting of European leaders on Oct. 23.
The new standard is likely to be a 9 percent core tier 1 ratio, a key measure of a bank's financial health, based on a tighter definition of capital than used now, although not as strict as that under new Basel III rules when in full force
Analysts at Credit Suisse said a 9 percent capital level would leave banks in need of 220 billion euros, with RBS, Deutsche Bank and BNP Paribas most in need.
Ackermann, Germany's most high-profile banker, said it was doubtful whether a blanket recapitalisation of European banks -- a measure being considered by politicians in Germany and France -- would help solve the sovereign debt crisis.
"It is not the capital position which is the problem, but the fact that sovereign debt as an asset class has lost its risk-free status," Ackermann told a conference in Berlin. "The key to the solution is therefore in the hands of governments, to restore confidence in the solidity of state finances."
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