More details last night on who and what are in the stress tests now being administered to European banks in an effort to restore confidence in the financial market.
First, we now know that 91 banks will be included in the test. And thanks to last night’s release from the Committee of European Bank Supervisors (CEBS), the organization conducting the stress tests, we even know which 91 banks are on the list. You can find the 91 names, organized by country, at the end of the CEBS announcement here http://www.c-ebs.org/documents/Publications/Other-Publications/Others/2010/ST_FollowupPR.aspx
Spain tops the list with 27 banks—including 13 from the troubled caja sector. Germany comes in second with 14 banks—including 6 from the Landesbank sector.
Second, like the U.S. stress test that this is modeled on, the European version won’t test bank balance sheets against the worst of all possible worlds. The worst case in the test will assume that the economies of the European Union go into recession in 2010 and 2011 and shrink by 2% this year and 1.3% next year. That’s certainly worse the current consensus forecast of 1% growth in 2010 and 1.7% growth in 2011.
And the test will assume that under those worst case conditions banks will lose 17% on their Greek government bonds and just 3% on their Spanish bonds. Considering that the market has also priced in much more of a drop that that, this assumption seems pretty mild.
But like the U.S. stress test, which was also designed around relatively small drops in the economy and in asset prices, I think this one will work to restore confidence largely because it will separate the okay banks from the deeply troubled. Investors understand, I think, that the test is by no means a guarantee. (For more on the test and why it’s needed see my post http://jubakpicks.com/2010/07/02/narrowing-down-the-list-of-europes-troubled-banks/ )
The results of the test are due to be released on July 23.