Key to European bank tests is fresh data: economists

26th July 2010, Comments 0 comments

More important than how many European banks passed their stress tests is that investors now have new data to decide for themselves if a bank is worth putting money into, analysts said on Monday.

"The biggest contribution from this is probably the open visibility, the transparency that we get about the banks," said Holger Schmieding, head of developed Europe economics at Bank of America Merrill Lynch.

"Having that probably helps a lot of investors now to make their own calculations as to how comfortable they feel about the European financial system," he said during a briefing broadcast from London.

Only seven banks -- six in Spain and one each in Germany and Greece -- failed tests designed to show if they could withstand an economic recession coupled with steep losses on loans, stocks and government bonds.

Many analysts slammed the tests as too easy, but after digesting the data over the weekend the verdict was more mixed, with residual scepticism joined by acknowledgement that a lot more information was now available.

The tests covered 91 top banks, accounting for 65 percent of the European banking system, with the results released late Friday.

"The stress tests were very helpful in delivering a huge amount of new and consistent data on the banks," Goldman Sachs economist Erik Nielsen said.

"The state of the system turned out better than most had thought," he added.

European officials meanwhile tried to calm concerns that some banks still have potentially fatal weaknesses after reports that not all were forthcoming.

The issue was highlighted in Germany, Europe's powerhouse economy, where reports said six lenders, including giant Deutsche Bank, had not made full disclosure of their sovereign debt holdings, a key item in the test process.

The Financial Times quoted Arnoud Vossen, secretary general of the Committee of European Banking Supervisors (CEBS), which compiled the results, as saying six banks did not give details that German law says cannot be pried from them.

Deutsche Bank said the details would actually come on Tuesday, as planned for some time in its quarterly results, and would be more up-to-date than those asked for in the tests.

Deutsche Postbank, which has Germany's biggest retail banking network and which only narrowly passed the stress tests, told AFP the reporting date of March 31 "was a problem for us because we wanted to provide recent data.

"We are permanently reducing our exposure" to sovereign debt, spokesman Joachim Strunk added.

Luxembourg Premier Jean-Claude Juncker, who heads the group of eurozone finance ministers, suggested the banks could release even more facts and figures to bolster confidence in them.

"I would like all the banks which have been taken under exam to publish details of the stress test concerning them," Juncker said.

Financial markets fear a debt default by a country such as Greece or Portugal could put weaker, undercapitalised banks that have bought such government bonds, at greater risk.

For analysts, however, the amount of data released -- and the prospect of more to come from the likes of Deutsche Bank -- was what really mattered.

The release of detailed holdings of government bonds "provides a much clearer picture of the distribution of sovereign risk among European banks than the scarce information" available beforehand, Citi analyst Giada Giani said.

"These data would allow investors to simulate their own 'stress scenarios' in case of a sovereign default."

Barclays Capital economist Thorsten Polleit said investors "should not rely on a stress test result made by regulators in the first place.

"Risk management includes the role of risk analysis and this has to be done by the investor, not by a government regulator," he said.

© 2010 AFP

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