The planned stress tests of European banks could be tougher than first thought. According to a German media report, up to 15 percent of the European banks to be examined may fail -- even though the criteria for the tests have been watered down, Spiegel Online reported.
The pan-European stress tests for banks won't be as easy to pass as previously thought, and 10 to 15 percent of banks assessed may fail them, German business daily Handelsblatt reported, citing an unnamed management board member of a large German bank.
More than 10 banks in Europe, including one or two in Germany, may fail the tests, the board member said. The results of the stress tests are scheduled to be published on July 23 to help reassure financial markets that Europe's banking system is strong enough to weather the euro debt crisis and the austerity programs launched to overcome it.
The executive told Handelsblatt that the tests needed to be credible in order to boost market confidence. The newspaper also cited unnamed financial sources as saying the tests were "not a show," and that they would simulate real challenges that banks might face. Analysts said one or two of Germany's Landesbanken, publicly-owned regional banks, might be found lacking.
The European tests will be conducted by national banking supervisors and will cover 91 banks. Markets have been increasingly concerned that some banks might be unable to cope with a sharp slowdown in economic growth resulting from the current wave of government spending cuts around Europe.
The tests model the impact on banks of possible economic scenarios. The Committee of European Banking Supervisors (CEBS) said it would test the banks to see how they would hold up if the economy deteriorated and the banks had to write off some of their sovereign debt holdings. The 91 financial institutions to be tested represent 65 percent of Europe's banking sector.
"Passing" would suggest a bank could withstand the stress scenario, while "failing" would imply it needs more capital to preserve core ratios in the scenario.
In a research note, Credit Suisse said German Landesbanken may have to raise up to €37 billion as a result of the stress tests. Spanish savings banks, which so far have partaken of €11.2 billion from the country's restructuring fund, would also need another €12 billion in a scenario where the economy weakened sharply and discounts were required on sovereign debt, the note said. Read more.
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