Europe to unveil banking sector check-up

18th June 2010, Comments 0 comments

Europe is finally set for a transparent check-up of its banking sector to curb financial market tensions, including information on weak regional lenders in Germany and Spain.

Central bankers in Frankfurt and Madrid have confirmed that the results of so-called stress tests will be published following initial resistance from critics wary of a possible negative market reaction.

In Brussels, EU leaders agreed to release the results of similar tests for other eurozone banks aimed at determining whether the lenders could withstand exceptional economic or financial shocks, diplomats told AFP on Thursday.

Spain and Germany had already decided to go public with analyses of their banks, including smaller institutions that are deemed most at risk.

Investors fear such banks might be unable to cope if they were to suffer massive losses on government bonds and real-estate loans.

Results on more than 20 major cross-border eurozone banks are being coordinated in London by the Committee of European Banking Supervisors but a CEBS spokesman declined to say exactly how or when they would be released.

In Frankfurt, German central bank governor Axel Weber warned that if the tests showed banks needed extra funding, governments must be prepared to give it rapidly, since otherwise the exercise could backfire.

"Any stress test only makes sense if it is accompanied by a corresponding commitment by the respective government to drive forward the process of recapitalisation and the guarantee of liquidity," Weber told a conference.

Germany is testing a broad cross-section of its banking sector and initial results would be available by mid-July, he said, adding that it "wouldn't be sensible" to exclude Germany's fragile state-owned Landesbank sector.

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

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

Critics warn that markets could misinterpret the findings and turn against the banks, although US tests done last year are believed to have underpinned confidence in the banking sector there.

The Bank of Spain was the first to say it would release information on Spanish banks that have become the target of growing market speculation.

ECB executive board member Lorenzo Bini Smaghi said that showed "we have moved from inactivity to leading by example."

He added that if banks did not have enough core capital, they would either have to merge with peers or raise fresh funds.

"In some countries like Spain there is some capital being put aside by the government in case the (banks do not) 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 divided on whether stress 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.

But UniCredit chief economist Marco Annunziata said: "Greater confidence in Spain's financial system could in turn bolster market optimism on the country's ability to repair its public finances."

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

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

Then again, he noted markets were not panicking as they did a few weeks ago, with Spain managing to place a large bond issue this week, 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 focus on problems with weak regional lenders in Spain and Germany but "keep their cool and continue with the structural work."

- Dow Jones Newswires contributed to this story -

© 2010 AFP

0 Comments To This Article