By Silvia Aloisi and Stefano Bernabei
MILAN/ROME (Reuters) - The European Central Bank (ECB) has asked Monte dei Paschi di Siena (BMPS.MI) to raise its core capital level to 14.3 percent as it sets new, tougher requirements for riskier lenders to bolster their financial strength.
The Tuscan lender, which emerged as the weakest bank in a Europe-wide health check of the sector last year, said the ECB request was preliminary and subject to changes, adding it was reviewing the proposal and would reply on Jan. 16.
Its shares were down 4.4 percent by 1205 GMT.
The ECB's 14.3 percent Common Equity Tier 1 or core capital requirement compares with a level of 12.8 percent the bank had at the end of September 2014.
Monte dei Paschi's statement came after Il Sole 24 Ore daily said the ECB had decided to assign specific capital requirements to individual banks which in the case of most Italian lenders will be much higher than those set by Basel III rules.
Italy's bank sector fared the worst in the ECB's assessment, laying bare the extent of the economic crisis in the euro zone's third biggest economy. Nine Italian lenders failed the tests although only Monte dei Paschi and Carige (CRGI.MI) still have a capital shortfall to fill.
The two banks have already announced plans for a 2.5 billion euro and a 700 million euro capital increase respectively.
The ECB sent letters to the banks it directly supervises where it outlined concerns and potential consequences based on the results of the assessment in October, banking sources said, but not all have been told to raise their capital levels.
The request signals steps by the ECB to tighten its grip as the euro zone's most powerful banking supervisor by making specific banks hold capital above minimum requirements depending on the riskiness of their operations.
One banking source described the letters as an individual dialogue based on details revealed by the unprecedented thoroughness of the assessment.
The banks have January to respond to those letters, though a second source said the room for negotiation was limited, and are expected to reach concrete conclusions in February.
Il Sole said the new requirements would in particular set an average common equity Tier 1 ratio floor for the 15 Italian banks under ECB supervision of 10.5 percent.
That compares with a general Basel III minimum capital requirement of 7 percent.
The new capital requirements are part of the so-called regular supervisory review of lenders, which was until last year done by national supervisors and is now done by the ECB.
European regulators say the review's purpose is to ensure banks have adequate strategies as well as capital and liquidity to ensure a sound management and coverage of risks to which they are or might be exposed.
"The ECB needs to show all the institutions that it takes its role as supervisor seriously," said KPMG partner Daniel Quinten, a former regulator at the German central bank.
"I would expect the ECB to dig a little deeper into all these areas - capital adequacy, governance and controls, liquidity, and business models," he said.
Some analysts said tougher capital rules could further curb bank lending, threatening efforts to kickstart the economy.
"There is a concrete risk that if banks must have higher capital levels, they will lend less to households and businesses, and this will have a negative impact on the economy," said Vincenzo Longo of IG.
Il Sole said the CET 1 floor requirement for UBI Banca (UBI.MI) will be 9.6 percent, while unlisted Banca Popolare di Vicenza will have to lift its CET 1 to 11.6 percent. It gave no exact capital requirements for other Italian lenders.
A source close to UBI confirmed the bank had received a request to raise its minimum core capital, without elaborating. Popolare Vicenza said the required capital level was "well below" 11.6 percent.
Il Sole said that if the banks fail to convince the ECB to reduce the proposed minimum requirements, they will have to apply the new floors as of February or March. The ECB declined to comment on individual banks.
(Additional reporting by Stephen Jewkes, Andrea Mandala, Francesca Landini and Luca Trogni in Milan; Eva Taylor, Thomas Atkins and Kathrin Jones in Frankfurt; Editing by David Holmes and Elaine Hardcastle)