The European Banking Authority will publish its final estimates of European banks' capital shortfalls at 1700 GMT Thursday.

The announcement is part of a "capital exercise" under which banks have to demonstrate they are adequately capitalized, even in the context of the current stressed market conditions for sovereign debt.

Bank recapitalization is one element of a multiple-part effort to restore confidence in the credit of Europe's banks and sovereigns. The EBA's announcement will come directly after the European Central Bank's monthly council meeting and immediately before a "make-or-break" meeting of EU heads of government aimed at saving the continent's monetary union.

As reported earlier by Dow Jones Newswires, the EBA applies a ratio of 9% in Core Tier 1 capital relative to risk-weighted assets as its definition of adequate capitalization.

In its preliminary estimate in October, based on end-2010 data, the EBA said it thought the 70 banks in the test sample would face a total capital shortfall of around EUR106 billion. The final data will be based on banks' positions as of the end of September.

Most of that shortfall is expected to accrue in countries where the national government bond market is under particular stress--Greece, Italy, Spain and Portugal.

However, the exercise is also expected to throw an uncomfortable light on German banks, which had lobbied the EBA to delay its announcement till mid-January.

A person familiar with the matter has told Dow Jones Newswires that Commerzbank AG in particular may face a far bigger shortfall than the EUR2.9 billion estimated by the market in October.

Also, regional lender Landesbank Hessen-Thueringen, which had refused to publish its full results under the EBA's stress tests earlier this year due to a dispute over methodology, again broke ranks with the process Wednesday. It said it expected the EBA to identify a capital shortfall of EUR1.5 billion at the bank as of September, but said this didn't take into account measures announced in November that will raise EUR1.92 billion of Core Tier 1 capital from the state of Hesse, giving it a capital ratio of 9.8%.

Most analysts have concluded that banks would rather meet their targets by reducing risk-weighted assets than by raising new capital from the market at depressed levels.

In the latest such development, Spain's Banco Santnder SA said Wednesday it would sell its Colombian operations, raising an estimated EUR615 million in Core Tier 1 capita.

The regulators have said they will stop any inappropriate plans to meet targets by restricting lending in European countries.

Recourse to state capital is also appearing increasingly likely. A German finance ministry official said Wednesday the cabinet will next week discuss measures to reactivate SoFFin, the vehicle it used to rescue German banks in 2008.

Elsewhere Wednesday, the Spanish central bank said the country's deposit insurance fund will inject EUR2.45 billion into failed lender Caja de Ahorros del Mediterraneo to sweeten its merger with Banco de Sabadell SA, in a move creating Spain's fifth-largest lender.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.