Europe braces for the release of bank stress tests

17th June 2010, Comments 0 comments

European governments are taking big steps towards revealing if banks can withstand shocks such as hit the global economy two years ago, and now in reaction to concern about finances in Spain.

Officials in Germany and Spain have agreed to publish results of so-called stress tests done on banks to reassure investors who fear banks might be hit by massive losses on government bonds and real-estate loans.

Germany, which had resisted such a move, "approves the publication of stress tests within the European Union. The details must be defined by EU finance ministers" meeting in Brussels on Thursday, a finance ministry spokesman told AFP.

"We see that markets are nervous and that trust between banks is lacking," he added. "Given the context, more transparency might help stabilise the situation."

Tests throughout the 16-nation eurozone were being coordinated in London by the Committee of European Banking Supervisors, a European Central Bank (ECB) spokesman told AFP.

The CEBS was likely to oversee publication of compiled results as well, he added.

In France, a source close to Economy Minister Christine Lagarde said tests on French banks showed "no particular cause for concern."

The governor of the French central bank, Christian Noyer, said that he favoured "the publication of the stress tests in Europe broken down by country and by bank".

In Brussels, EU leaders were to mull how best to publish the results of the tests, which aim to establish how well equipped banks are to absorb a major event such as default by a key debtor.

Stress test critics warn that markets could misinterpret the findings and turn against the banks, though US tests done last year are credited with having restored confidence in the banking sector there.

On Wednesday, the Bank of Spain said it would release information on Spanish banks that have become the target of growing market speculation.

And ECB executive board member Lorenzo Bini Smaghi said that harmonised bank stress tests -- fresh ones are being done on some 30 major eurozone banks -- would be released for each eurozone member.

"Supervisors in Europe are stress testing the banks and those results will be made public within a couple of weeks, at the latest," starting with Spain, he told CNBC television in New York.

If banks did not have enough core capital, they would either have to merge with peers or raise fresh funds "within a given deadline," Smaghi said.

"In some countries like Spain there is some capital being put aside by the government in case the bank doesn't find it in the private markets," he added.

Spain's banking system is laden with loans that went bad after the country's real-estate market collapsed, and regional savings banks have been frozen out of the interbank money market.

Analysts were not convinced centralised tests were effective or necessary, however.

"It's a complex exercise, it's not really something that is easily digested by a wider audience," Barclays Capital economist Thorsten Polleit told AFP.

Beyond the risk of misinterpretation, Polleit said it was up to investors like insurance companies and pension funds "first and foremost to do risk analyses" themselves.

"People cannot rely on third parties to do the work properly," he added.

ING senior economist Carsten Brzeski saw two sides to the issue, he said.

"If you have nothing to hide then just come out with the stress tests," he told AFP.

Then again, Brzeski noted markets were not panicking as they did a few weeks ago, and wondered whether EU governments should "always be hijacked by markets and always be pushed into this kind of ad-hoc reactive mode."

He suggested authorities should focus on problems with weak regional lenders in Spain and Germany but "keep their cool and continue with the structural work."

© 2010 AFP

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