EUROPE’S NASCENT campaign to recapitalise weakened banks has run into a concerted backlash from bank leaders, potentially undermining the clamour for decisive new measures to tackle the debt crisis.

EU bank regulators are preparing to include for the first time the risk of sovereign default in a new examination of stress test data. The drive to boost banks’ capital comes amid expectation of a bigger than anticipated “voluntary” loss on Greek bonds as part of its second bailout.

The level of capital required will be set by the European Banking Authority, a new pan-European regulator. In anticipation of its new stress test, bank lobbies are trying to dissuade political leaders from embarking on the recapitalisation drive.

“European banks feel they are being held hostage by the sovereign debt crisis,” said Guido Ravoet, chief of the European Banking Federation, which represents most big lenders in the EU.

“A co-ordinated European solution to the major problem of the sovereign debt uncertainty is the only way out of the current crisis of confidence, but we do not see the proposed recapitalisation of European banks as central to the solution.”

Mr Ravoet said “it may not be easy” to tap the open market. His attack on a European Commission proposal to bring forward by three years the introduction of strict Basel III capital rules came as German bank lobbies warned finance minister Wolfgang Schäuble against the application of the same standards.

European banks may need as much as €200 billion in new capital.

The effort is designed to free up inter-bank lending markets, frozen due to fear of a Greek default, and lessen banks’ reliance on emergency ECB liquidity.

Although the authorities will not admit it, the initiative is also designed to protect banks from the consequences of a Greek debt restructuring.

Banks fear increased nationalisations, but a senior European official said it was not the case that the private market for investment had dried up. The official cited a private capital-raising by the Bank of Ireland earlier this year and its move this week to raise €1.1 billion in unguaranteed debt.

Banks will be told to raise capital within six months, in line with a new minimum limit – possibly a 9 per cent core tier one threshold – but this has yet to be set.

Separately, the European Central Bank has warned that moves to increase bondholder losses in the second Greek bailout could trigger more market volatility.

Also, the Slovak parliament has voted to strengthen the EFSF bailout fund.