Too few European banks have been wound down over the past few years, the chairman of the European Banking Authority (EBA), Andrea Enria was quoted as saying in an interview published today.
Enria told German daily Frankfurter Allgemeine Zeitung that national governments tend to want to keep their lenders operational rather than let them fail.
He said this has slowed the process of repairing the banking sector.
"I am convinced that too few banks in Europe have been wound down and disappeared from the market so far. It has been fewer than 40 institutes, in the US by comparison there were about 500," he said.
The EBA, Europe's top banking regulator, is preparing tests on the finances of top lenders, potentially paving the way for further multi-billion euro fundraising measures by banks deemed shaky.
Enria said that it is sensible to set out the stress scenarios to be used in the tests shortly before the exercise begins.
"It would be good to time the announcement shortly after the EU Commission releases its spring forecasts," Enria said, adding that the tests should be based on the most current macro economic projections possible.
"As to the methodology, we want to make that clear earlier. We are already very far advanced," he added.
However, he pointed out that the treatment of losses on sovereign bonds remains a problem because they are considered risk-free under current banking rules.
"Government bonds that are in the trading book in banks' balance sheets and are declared as being up for sale should be marked to market value, even if that causes losses," he said.
While big banks are already attaching some risk to government bonds in their internal models, the question is whether the risk-weightings are appropriate, particularly as there are big variations in how individual banks treat the same bond, Enria said.
"That won't do," he said, adding that the EBA would push for consistent and conservative valuations in the stress tests.
"We don't want banks to throw out their own risk models, but we need consistency," he said.