Bank stress test pandemonium expected

23rd Jul 2010 08:38

No nipping off on holiday for bank analysts this weekend, as today sees the publication of the results of how ninety-one European banks would fare if another economic crisis blew-up.The Committee of European Banking Supervisors (CEBS) said the stress tests assumes a double-dip recession with the economy shrinking by 3% over 2010 and 2011, stock markets falling by a fifth and sharp rises in interest rates.Banks failed the test if they were unable to maintain a Tier 1 capital ratio of 6% under each scenario.Pandemonium is predicted, especially if the numbers leak out before the markets close. The official release time is 5pm.Spain's El Pais newspaper reported on Friday that several of Spain's savings banks have failed the test.For those banks that pass the 'stress test', credit lines will ease and a return to normality awaits. For those that fail, it's the midnight oil working out how to raise money to refinance in a market where appetite for high risk debt is diminishing rapidly.Nova Ljubljanska Banka, Slovenia's largest bank, already confirmed today that it would seek to raise €400m via a rights issue but declined to say whether it expected to pass the stress tests.Critics of the tests say they have been set so low it amounts to nothing more than a PR stunt to reassure investors in Europe. The cost of credit default insurance on some southern European bank debt has hit levels not seen since Lehman Brothers crashed. If no banks fail, the whole exercise faces the risk of being dismissed as a whitewash. If some do fail, or indeed if too many do, the impact on financial confidence could be severe. The mood among analysts is mixed. Credit Suisse has already tipped a "no bank failing" scenario, while Nomura suggests a number of banks could require cash injections after the results."The particular focus will be on the German landesbanks, the Spanish cajas and the Greek banks that, despite official statements so far, are still likely to require additional capital following the stress tests," the Japanese broker says.Britain's banks are expected to escape relatively unscathed. The Financial Service Authority has already subjected the UK banks to a stress test said to be more vigorous the European version and none of the big UK banks failed that.That said, all the UK banks have big business in Europe and all banks across the continent have been accused of taking too bullish a view of the loans on their books. That may have to change after 5pm today.