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E.U. Stress Tests to Cover 65% of Financial Sector

E.U. Stress Tests to Cover 65% of Financial Sector

By Jack Ewing

8 July 2010

FRANKFURT — In what could be a first step toward restoring confidence in the health of European banks, a panel coordinating stress tests of major institutions said Wednesday that its findings will be disclosed on July 23 and cover institutions representing most of the E.U. banking market.

The Committee of European Banking Supervisors, made up of European Union regulators, said it will release results of the anxiously awaited tests for 91 banks accounting for 65 percent of the E.U. banking market and at least 50 percent of the market in each member country.

The announcement indicates that the European Central Bank and national regulators involved in managing the tests were able to overcome resistance from German public-sector banks and other institutions, which initially opposed disclosing the outcome of the tests that are designed to measure institutions’ ability to withstand a deterioration in economic and financial market conditions.

The committee offered only a broad description of how the tests will be conducted, and it was not yet clear whether the tests will clear up doubts about bank creditworthiness that have choked interbank lending in Europe.

There has been widespread skepticism that the tests would be rigorous enough and that regulators would release enough detail about the results.

“The publication of the stress tests will not provide a realistic picture of the health of the banking sector as some of the assumptions retained are implausible,” Marie Diron, an economic forecaster for the consulting firm Ernst & Young, said in a statement before the committee’s announcement. “As a consequence, uncertainty and thereby tensions in the interbank market will remain.”

The banking supervisors’ committee said it will test banks’ ability to withstand a 3 percentage point deviation from European Commission growth forecasts for the next two years, as well as a sovereign debt shock like the one that occurred earlier this year, when only an extraordinary rescue package by European countries prevented a market meltdown.

Interbank lending nearly froze early in May because of uncertainty about which institutions were vulnerable to disaster scenarios like a debt default by the Greek government or severe declines in the value of bonds issued by Spain and other highly indebted countries.

The tests will also take into account how much individual banks are still dependent on government or central bank support.

“The objective of the extended stress test exercise is to assess the overall resilience of the E.U. banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures,” the committee said in a statement.

A list of banks to be tested included most of the German Landesbanks, which have close ties to local governments, as well as numerous Spanish thrift institutions, or cajas. Both categories are regarded as vulnerable, and investors and analysts have been keen for more detailed information on their holdings and liabilities.

The largest multinational banks in Europe will also be included, including HSBC and Barclays in Britain, Deutsche Bank and Commerzbank in Germany, and Société Générale and BNP Paribas in France.

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