Source: EU Observer
Author: Andrew Willis
Europe is bracing itself for the publication of a set of highly anticipated stress test results, the culmination of a four-month long exercise designed to dispel doubts over the region's banking sector.
The results, due to be released at 5pm CET on Friday (23 July), will show how well the 91 banks under examination could withstand further economic shocks, amid ongoing concerns from a number of national regulators that US markets will still be open as the information becomes public.
The tests have been carried out by the Committee of European Banking Supervisors, a body of national supervisors and central bank representatives, with attention equally fixed on how markets assess the thoroughness of the exercise, as well as which banks have been deemed as under-capitalised.
Any doubts in this area could carry considerable negative consequences if markets reject the tests as mere political whitewashing.
EU leaders called for the publication of the results at their meeting in Brussels in June, with Spain leading the charge to shine a closer spotlight on bank balance sheets in a bid to end a run of negative speculation on the county's financial sector.
Madrid has chosen to include 27 banks in the process, representing 90 percent of its local banking market, considerably higher than the EU average of 65 percent. The country is expected to see the largest amount of failures, with many regional lenders, known as cajas, badly exposed to the downturn in the property market.
Germany's regional banks, the Landesbanken, as well as a number of Greek banks may also be among the list casualties, but governments have vowed to support weaker institutions with capital injections if needed.
While most member states have generally expressed confidence in the ability of their firm to pass the test, Slovenian prime minister Borut Pahor on Thursday admitted the state's largest bank would need a recapitalisation.
The banks in the 16-nation eurozone and in Britain, Denmark, Hungary, Poland and Sweden have been checked to see if they have sufficient capital to withstand shocks such as a three percent fall in EU GDP.
Exposure to eurozone sovereign bonds is also being analysed, with concerns that banks are hoarding billions of euros worth of devalued Greek, Spanish and Irish bonds one of the chief reasons behind investor jumpiness.
The United States has been a leading voice calling for the results to be made public, after a similar exercise across the Atlantic in May 2009 helped restore a degree of confidence in American firms.
Since then, EU banks have already received ¬200 billion in government support, with more potentially in the offing.
EU economy commissioner Olli Rehn recently indicated that money from the bloc's ¬750 billion support mechanism could be channeled indirectly to banks via national governments if needed.
A number of analysts have predicted that Friday's publication will result in market consolidation, as weaker banks become the target of takeover bids.
"There are 91 banks being tested at the moment, I don't think there will be 91 at the end," Rym Ayadi, a researcher with the Centre for European Policy Studies, a Brussels-based think-tank, told EUobserver in a recent interview.