Up to one in six European banks is set to fail an EU-wide financial health check, according to eurozone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. The result, which the European Central Bank and others hope will persuade investors the European Union was finally coming clean about the extent of banks' problems, will pressure reluctant states to prop up lenders that cannot raise money.
Euro zone sources said the European Banking Authority was set to announce within weeks that 10-15 of 91 banks being scrutinised had failed, with casualties expected in Germany, Greece, Portugal and Spain. The checks will provide the first picture of the health of EU banks since a previous round a year ago was deemed too lax. In that round, Irish banks were all given a clean bill of health months before their difficulties drove the country to seek an international bailout.
The new checks will measure how well the core capital that banks rely on to absorb losses such as unpaid loans holds up when exposed to an economic dip or fall in property prices. They also gauge the impact on banks should government bonds they own, issued by states such as Greece, lose value. But the tests stop short of assessing the full impact of a country defaulting, including the likely resultant freeze in interbank lending. In the drive for credibility, the EBA, which runs the tests and the ECB, which sets the economic scenarios, have pushed for more banks to fail than last year's seven.
"How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source. The EBA wants the number of banks that do not pass the tests to be around that level to show the examinations were serious, said a second source, adding the authority did not want to push for more, for fear it could spark panic.
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