EU to put banks under ‘stress test’ for worst-case scenario

The European Union is preparing to put its 25 biggest banks under a 'stress test' scenario of slower economic growth and pressure on sovereign debt holdings. The tests will be conducted by national banking supervisors under the management of the committee of European banking supervisors (CEBS), and in a second stage extend to more banks than the initial 25.

The tests are intended to gauge whether banks' balance sheets are strong enough to cope with another sharp deterioration in the economy. In an indication that the EU is optimistic about the economy, markets rallied and bank stocks rose after the news. Tensions in European money markets eased with the two-year dollar swap spread falling to a one-month low of 34.5 basis points, off a one-year peak of 64 bps hit three weeks ago.

Market watchers say Spain's Banco Santander and BBVA may be rated the two healthiest banks in Europe when the EU publishes the results of the stress tests in the coming weeks, while Germany's unlisted Landesbanks could be among the weakest.

European leaders agreed on Thursday to publish the results of the tests no later than the second half of July after the governor of the Bank of Spain said he would release the results of tests on Spanish banks, whether or not there was an agreement.

Officials of many European governments and the European Central Bank have said the tests are likely to show there are no system-threatening problems in Europe's bank sector, which has been working to repair its balance sheets since the global financial crisis of 2007-2009.

After resisting for months the idea of revealing results of stress tests for individual European banks, because they feared the information could alarm markets, European leaders agreed at a summit on Thursday to publish details next month. The change of heart originated at a conference call of finance ministers of the Group of Seven major nations on June 14, euro zone sources said.