Europe’s banking system would need as much as 250 billion euros ($355 billion) of new capital if faced with a “sharp” increase in yields and a “severe” economic contraction, Standard & Poor’s said in a report. The report imagines three stages that may happen from 2011 to 2015 including soaring yields triggered by an interest-rate shock, restricted market access for weaker sovereigns and a “very severe” downturn in the economies of Greece, Ireland, Portugal and Spain. Of S&P’s sample of 99 financial institutions covering 70 percent of Europe’s banking system, 22 would need new capital at a total cost of about 161 billion euros, according to the report. Extending that to the full European banking system would cost 200 billion euros to 250 billion euros, or about 2 percent of economic output of those lenders’ jurisdictions, S&P said. “The overall effect on the creditworthiness of western European countries, if it were to happen, would be severe,” S&P said in the report. “It would lead to substantially higher debt levels for all sovereigns throughout the region; hardly sustainable fiscal positions,” as well as the bank recapitalizations. The scenario is based on “assumptions that do not reflect our current thinking,” S&P said. To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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