Every analyst on—and many off (including yours truly)—Wall Street is trying to put numbers to the results of the Euro Zone’s bank stress test.
In recent days we’ve moved from opinions on which country’s banks will be hit hardest (See my post of yesterday, July 8, Naming names: now we know which 91 European banks will face the none-too-challenging stress test ) to guesses on which banks will pass and which will fail to estimates of how much extra Tier One capital each tested bank will have to raise.
Banks that have to raise a lot of capital but that are shut out of the financial markets right now will require some kind of government rescue. Euro Zone governments have pledged to ride to the rescue but there’s no mechanism yet actually in place for any rescue that’s needed.
All these projections are built on much guess work right now since the terms of the stress test and the Tier One capital requirement that banks will have to meet haven’t been officially disclosed.
One of the best bits of guess work that I’ve seen to date comes out of Credit Suisse. Analysts there project that all the name banks in France and Spain, and almost all the name banks in Germany (Deutsche Postbank will have to raise about $1.8 billion in new capital) will pass the test and won’t need to raise additional capital.
The failures will be concentrated among Greek banks (no surprise) and the regional Landesbanks of Germany and the Caja sector in Spain. (No surprise there either.)
Credit Suisse projects that the Landesbanks will need to raise almost $40 billion in new capital and Spain’s cajas will need to raise $15 billion in capital in the short-term and $75 billion in the long-term.
Those sums are big enough to present a new challenge to the European financial system.
Germany’s government bank rescue fund has a little over $60 billion available. Spain’s equivalent fund has just $15 billion available.
I’d expect that very quickly after the results of the stress tests are announced on July 23 the financial markets will start worrying about how the Euro Zone will fill any capital gaps.