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April 08, 2011 at 06:18 AM
The European Banking Authority (EBA) announced Friday that the 90 banks that must undergo regional stress testing will have to maintain their core Tier 1 capital levels above 5% during an imagined 2-year recession or they will not pass.
According to Reuters, the EBA has set tougher standards than those it used last year, in an effort to reassure taxpayers. Those requirements are comparable to standards in U.S. private tests, according to the EBA. Although banks in the U.S. that passed strongly were permitted to increase dividends or repurchase shares, European banks are instead being urged to hold their capital.
This is the third round of tests since the beginning of the financial crisis, and in this evaluation, the EBA has said it will exclude much of a hybrid capital instrument that is used by many state-owned banks in Germany because of controversy over its complexity. Instead, the definition of core Tier 1 capital has been set as mainly consisting of common equity and retained earnings.
