The number of European banks subjected to stress tests is likely to rise, with sources suggesting that as many as 100 institutions will be involved in a broader exercise to shore up market confidence.
European Union leaders have already agreed to publish stress test results for 26 banks next month – mainly big, cross-border institutions – to address concerns about the eurozone’s exposure to sovereign debt.
But one German government official said those tests, which are being conducted by the Committee of European Banking Supervisors (CEBS), would be expanded to cover “significant market share” in each market – about half of all bank balance sheets in each country.
While the total number of financial institutions to have stress tests published remained open, the German official also said the country’s eight Landesbanks had agreed to publication.
This suggests the number of German banks tested will easily reach 10 – the Landesbanks, owned by the states and municipal savings banks, plus Deutsche Bank and Commerzbank – and could increase.
The weakened Landesbanks had resisted publication until now, arguing that testing their ability to withstand sovereign defaults would send the wrong signal to bond investors.
The German government had supported this line but has come round to viewing publication as a potentially important confidence-building exercise.
CEBS declined to comment on the timing, stress parameters or identity of the banks. But three people familiar with the situation said the results of the tests would be published on July 15.
Talks held on Friday in Brussels under the auspices of the EU’s economic and financial committee, which brings together high-level officials from national finance ministries, were believed to focus on expan-ding the exercise significantly.
European authorities have come under mounting pressure to widen the tests to include second-tier banks thought to be most at risk, including the Landesbanks and Spain’s cajas, or smaller saving banks. Bankers say the drive for full disclosure of the results was led by the Bank of Spain, following frustration that the markets had turned negative on the Spanish banking sector as a whole, due to the weakness of some cajas.
However, the process itself remains shrouded in mystery, particularly with respect to the parameters of the tests.
CEBS has said the parameters were being set at a pan-European level, despite suggestions from several banks that have been tested that the stress scenarios were nationally specific.
In a limited exercise last year, CEBS said its stress scenario involved a 2.7 per cent fall in GDP this year and 12 per cent unemployment.
But regulators and bankers said the exercise would be far more fulsome this year. Specifically, one official said that EU nations had agreed to test their banks’ ability to withstand national debt crises by modeling an increase in CDS spreads in the sovereign bond market.
But one top banker said that even if the list were expanded it would not serve the purpose of sufficiently reassuring the markets. “You need total transparency,” he said. “You need to publish the results of the entire banking system – otherwise, suspicions will remain.”
Reporting by Gerrit Wiesmann in Berlin, Nikki Tait in Brussels and Megan Murphy and Patrick Jenkins in London