Europe is finally set for a transparent check-up of its banking sector to curb financial market tensions, including information on fragile regional lenders in Germany and Spain.
Central bankers in Frankfurt and Madrid have confirmed that the results of stress tests will be published following initial resistance from critics wary of a possible negative market reaction.
In Brussels yesterday, EU leaders agreed to release the results of similar tests for other euro zone banks to show whether they could withstand exceptional economic or financial shocks, diplomats said. 'We agreed that a stress test of the banks will be published at the latest by the end of July,' one said.
Spain and Germany had already decided to go public with analyses of their banks, including smaller institutions deemed most at risk.
'We see that markets are nervous and that trust between banks is lacking,' a German finance ministry spokesman explained. 'More transparency might help stabilise the situation,' he added.
According to a senior euro zone source, the EU is to stress-test its 25 biggest banks under the scenario of a slowdown in economic growth and stress on sovereign debt holdings.
The tests will be conducted by national supervisors under management by the Committee of European Banking Supervisors (CEBS) and in the second stage extend to more banks than the initial 25, the source said.
‘CEBS has been doing this for quite some time. These are agreed criteria with a macroeconomic stress scenario that has been agreed with the ECB, simulating first a growth slowdown ... and also simulating stress on sovereign holdings,’ he said.
‘They are now working on phase two, which will extend the results to well beyond the 25 largest banks.'
The EU conducted an aggregated stress test of its 22 biggest cross-border lenders representing 60% of the assets of the 27-country bloc's banking sector last year, under the scenario of deep recession in 2009 and 2010.
The test concluded that the EU banking system as a whole was sound and could withstand a much worse economic downturn than had taken place.
Investors fear some banks might be unable to cope if they suffered massive losses on government bonds and property loans.
European Commission chief Jose Manuel Barroso urged EU leaders to act 'on a bank-by-bank basis' to 'lift unfounded suspicions' and address eventual 'difficulties under the most adverse scenarios,' an official said.
The results on over 20 big cross-border euro zone banks are being coordinated in London by the Committee of European Banking Supervisors.
German central bank governor Axel Weber warned that if tests showed banks needed extra funding, governments must be prepared to give it rapidly.
'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 said in Frankfurt.
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 would not be sensible to exclude troubled state-owned Landesbanks.
In France, a source close to Economy Minister Christine Lagarde said tests showed 'no particular cause for concern'.
Critics warn that markets could misinterpret test findings and turn against some banks, although US tests done last year are said to have bolstered trust in the banking sector there and set the stage for financial market recovery.
The Bank of Spain was the first to say it would release data on Spanish banks, after they became the target of growing market speculation. Spain's banking system is laden with loans that went bad after the country's property market collapsed, and regional savings banks have been frozen out of international interbank markets.
