Could Europe's banks be in even worse shape than ours?

Hard as it is to believe, it looks likely:  European banks are in deeper trouble than those in the U.S. and they’ve done less to clean up their balance sheets than their U.S. counterparts.

At the end of this week, the finance ministers of the European Union countries are set to release their version of the U.S. stress test. You remember that exercise back in May, don’t you? U.S. regulators examined the books of 19 of the biggest U.S. financial companies and declared that 9 were adequately funded but that 10 had to raise a total of $75 billion in capital.

Well, the results from the European version of that test differ in one crucial way: while regulators will release a total that 22 large banks would lose if the economy grew more slowly than now expected, they aren’t going to name the banks that need recapitalization.

And you thought disclosure in the U.S. was bad.

Figures leaked to date say that European Union banks could face close to $600 billion in credit losses this year and next if European economies perform below projections. That figure is large enough so that keeping the identities of troubled banks secret is likely to stoke rampant speculation about which institutions are in trouble.

The early betting is that it’s Germany’s state banks, the Landesbanken, that face the biggest potential for credit losses and have the biggest need for capital. That speculation has been fed by this sector’s terrible performance in the crisis to date and the fierce opposition from Peer Steinbruck, the German finance minister, to the release of the names of specific banks.

Investors will get a preview of the European Union’s stress tests on Wednesday when the International Monetary Fund is due to publish its own report on the health of the world’s banks. Back in April the IMF estimated that U.S. banks needed $275 billion in capital to cover losses and that European banks needed even more, $375 billion in capital, to cover losses. It will be interesting, to say the least, to see what progress has been made, in the IMF’s opinion, since April.

It should be a volatile week for bank stocks in general and Europe’s bank stocks in particular.