Last night it emerged that the European Banking Authority (EBA) is planning to set a higher-than-expected tier one threshold of 9%, considerably higher than the 6-7% forecast by analysts.
The move is designed to further shore up the banks’ reserves in an attempt to prevent funding difficulties and restore confidence among investors.
But Julian Chillingworth, chief investment officer at Rathbones, said this higher threshold still fails to address the lack of solvency many banks are experiencing as inter-bank lending remains subdued.
He said while the 9% tier one limit should improve the market’s opinion on the handling of the euro crisis, realistic stress tests are required to fully restore confidence in the sector.
Up until now the stress tests have failed to calm investors because they have only looked at liquidity and not solvency.
The credibility of the tests was also called into question last week when Franco-Belgian bank Dexia found itself in trouble, despite passing the stress tests held in July.
Nick Ziegelasch, global analyst at Killik & Co, said the 9% threshold would be considerably dilutive for investors currently holding bank stocks.
But he added that over the long term it should bring stability to the market and have a positive effect on the banking sector as inter-bank lending should receive a boost.
Lending between banks has been subdued in the past few months because they are unsure of each other’s exposure to bad sovereign debt.
This weekend tests are to be conducted which will reveal the extent of European banks’ exposure to bonds in the struggling periphery nations and putting a higher tier one requirement in place should prevent too much negative fall out from the results.
Chillingworth warned, however, that while this latest move by the EBA is a step in the right direction it is far from an end to the issues banks face in the eurozone.
"It is more of the same and I do not think there is an easy, early solution to this problem at all. We might go round stress testing Greek debt exposure among the banks, but what about Portuguese debt?
"The whole eurozone issue is just going to be more of the same and we won’t get complete agreement across the euro members until something dire happens, and that probably means a major bank getting into funding trouble," he said.
