European banks on edge over stress test exam
ECB - Photo Martin Stahl
(PARIS) - Powerbrokers in European finance expect a few black marks when results of tests on the capacity of European banks to survive new shocks are released on Friday but also count on governments to help the weaklings.
Ministers and top eurozone officials have insisted that overall, the European banking system will pass these critical "stress tests."
But they have also made clear that any banks failing the tests will be ring-fenced with official support.
Credit rating agency Fitch said it thought that "capital will be made available by governments where the stress tests ... indicate shortfalls and banks are unable to raise capital in the public markets."
It voiced concern "that conditions in European funding markets remain difficult for some banks."
Banks in the 16-nation eurozone and in Britain, Denmark, Hungary, Poland and Sweden have been checked to see if they have sufficient capital to withstand shocks such as those which caused the collapse of US investment giant Lehman Brothers in 2008.
The purpose is to ensure that financial markets have a trustworthy overview of the banking sector, and European governnments decided to publish the results especially to combat potentially fatal uncertainty and scepticism.
"The stress tests ... need to give us two crucial indications: first, how much more will banks suffer if GDP growth is significantly lower and sovereign bonds come under more pressure, and second, how many ailing banks are hiding behind the veil of ... reassuring eurozone numbers," said UniCredit analyst Loredana Federico.
Analysts said that just as critical as the scores achieved by banks, will be the scores attributed by financial markets to the rigour of the tests and the way funding is made available to weak banks.
Some expect that a scattering of banks in Germany, Italy, Portugal, Spain and Greece might be found wanting.
The eurozone and EU economies were brought to the edge of a snowballing crisis three months ago as Greece battled to avoid a debt default.
Publication of the tests is intended to help ward off clouds of doubt over European banking and contribute to pushing back any new crisis of confidence over banks.
Recent extreme tensions, which helped provoke the decision to publish the stress tests, arose from a culmination of spreading contagion from the Greece crisis and suspicion that some European banks were in poor shape, partly because of their exposure to government debt.
German Chancellor Angela Merkel emphasised on Wednesday that long and technical talks had resulted in tests that "represent reality."
Stress tests carried out in the United States last year are widely said to have restored confidence, and most US banks that "failed" got financing to restore them to health.
ING strategist Jeroen van den Broek said that in general, "the greatest fear is that the test shows too little diversification between the good, the bad and the ugly, and is seen by the market as being too optimistic.
"The outcome simply must be realistic; a true classification of the European banking system with necessary capital injections lined up will, in the long term, be beneficial to banking confidence."
The tests by national regulators on 91 banks representing 65 percent of the EU banking sector, are to be published by the London-based European Banking Supervisors at 1600 GMT. Some key data could leak out earlier however.
They are expected to show how each bank would cope if economic growth slows sharply, if money owed is not paid, if stock markets plunge or if there is a crisis on sovereign debt markets which devalues big quantities of government debt held by banks.
The bottom line of the tests is how the balance sheets of the banks would look once they had been adjusted for the effects of such shocks: in other words would they have enough capital to continue operating.
The Australian bank Macquarie has listed banks it thinks may not be able to resist severe shocks, among them Germany's Postbank, Banco Popolare of Italy, BCP of Portugal and Spain's Sabadell.
Four Greek banks were also on Macquarie's list: the National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank.
In Germany, attention has focused on troubled state-owned banks, especially Hypo Real Estate.
In Spain, El Economista newspaper said none of the eight Spanish banks and 19 savings institutions which have been tested should fail, thanks to injections of capital from the government.
An Italian newspaper, Il Messaggero, meanwhile reported on Thursday that the five Italian banks which have undergone the tests were shown to have core capital reserves well above what would be needed to absorb a new shock.
Committee of European Banking Supervisors (CEBS)