FRANKFURT (Reuters) - Euro zone banks will have up to nine months to fill potential capital holes that an unprecedented health check by the European Central Bank may uncover in October, the ECB said on Tuesday.
The ECB is putting the euro zone's 128 top lenders through a thorough review of their balance sheets to weed out soured loans, update collateral valuations and adjust capital before the central bank becomes the banks' supervisor in November.
Alongside the ECB's backward looking loan book review, the European Banking Authority is also conducting a forward-looking stress test to see how European banks will hold up under certain economic shock scenarios.
All results will be published in October and the ECB will then ask banks to submit capital plans, detailing how they will cover potential shortfalls.
They will have six months to respond to capital shortfalls identified in the balance sheet review and the baseline of the stress tests. They are expected to fill gaps identified in the adverse stress test scenario within nine months.
"In anticipation of any shortfalls, banks should start to consider what private sources of capital could be raised as a result of this exercise and plan accordingly," ECB Vice President Vitor Constancio said.
The capital plans can include retained earnings, reduced bonus payments, new issuances of common equity, suitable strong contingent capital and sales of selected assets at market prices, he added.
The ECB also specified that shortfalls from the balance sheet review and baseline stress test scenario may only be covered by Common Equity Tier 1 capital, while additional Tier 1 capital to cover shortfalls from the adverse scenario was limited, depending on the trigger point of conversion or write-down.
The ECB also said that significant efforts had been made to streamline the data requests to ensure feasibility and minimise the reporting burden for banks without compromising the quality of the exercise.
(Reporting by Eva Taylor; Editing by Paul Carrel)