Analysts say some European banks will fail stress tests

21st July 2010, Comments 0 comments

Analysts expect some European banks to fail so-called stress tests when results are published on Friday, and question whether the tests themselves will suffice to calm financial markets.

The Australian bank Macquarie listed on Wednesday those banks which it felt might not be able to resist severe shocks in the future, among them Germany's Postbank, Banco Popolare of Italy, BCP of Portugal and the Spanish Sabadell.

Four Greek banks were also on Macquarie's list, the National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank.

Macquarie analysts felt those banks would not even satisfy basic criteria based on the European Commission's current macro-economic forecasts.

The tests also check bank resources in the event of a more adverse scenario under which growth is three percentage points lower than forecast and the bank must book losses on sovereign debt it has bought.

Counterparts at Nomura also identified Postbank as being at risk in addition to the second biggest German bank, Commerzbank, which German media believe has passed the tests.

Commerzbank chief executive Martin Blessing made no comment when he arrived on Wednesday at the European Central Bank for a meeting with other bank executives and ECB governors.

The most often cited German candidate for failure is state-owned Hypo Real Estate, a specialist in property lending and municipal financing.

"What I hear about HRE is plausible, but let's wait to see the results," German Chancellor Angela Merkel said Wednesday.

Uncertainty is especially high for unlisted banks that analysts do not follow and which publish a limited number of financial figures.

The British bank Barclays estimated meanwhile that state-owned German regional banks and Spanish savings banks would have to find several dozen billion euros in fresh financing to meet criteria.

Analysts also posed questions about the tests themselves, which are designed to clarify the situation at major European banks by checking how well they would withstand shocks like that caused by the collapse of US investment bank Lehman Brothers in 2008.

That is meant to ease chronic tension on interbank money markets which are crucial for the supply of credit to the broader economy.

Macquarie analysts worried however "that stress assumptions will be too weak to provide real clarity."

An official test that was "more lenient" than Macquarie's own, "could impair credibility, particularly if a handful of banks that face severe domestic headwinds and no access to wholesale funding markets are given the all clear'," they said.

The credit rating agency Fitch said in a note on Wednesday that it believed that "capital will be made available by governments where the stress tests in respect of 91 European banking groups indicate shortfalls and banks are unable to raise capital in the public markets."

Fitch said that "funding conditions will remain key."

© 2010 AFP

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