EU credibility on the line in stress tests

AT LEAST two Spanish banks are set to fail the EU’s second set of stress tests this evening, with some bankers saying that their publication could spark a market meltdown on Monday.

CatalunyaCaixa and Pastor admitted that they will fail after Spanish finance minister Elena Salgado warned that the tests would show up several failures, in contrast to Italian central bank governor Mario Draghi, who said that his nation’s banks are safe after €8bn (£7bn) in capital-raisings.

Banks have to show that they can maintain a five per cent capital ratio in an “adverse” scenario in which the EU economy shrinks 0.4 per cent this year and does not grow at all in 2012.

Moody’s warned last week that up to a third of the 91 banks being tested could fail tests that are more stringent than last year’s exercise, in which all of Ireland’s banks were deemed healthy weeks before they had to be bailed out.

The new tests have been criticised for not including the possibility of a sovereign default in the “adverse” scenario, but are tougher in that they have not allowed banks to include convertible bonds and provisions put aside for other matters in their capital cushions – a factor that Pastor and CatalunyaCaixa blame for their failure.

Analysts will take charge of crunching more than 900 pages of data at 5pm today (UK time), which will for the first time give a detailed breakdown of banks’ exposure to sovereign debt and to various related derivatives. However, critics say that the tests should force banks to mark to market their risk-weighted assets (RWA), rather than estimating their value.

The European Banking Authority (EBA) will not publish a complete analysis to markets, in part due to manpower constraints. Instead, analysts will spend the weekend ploughing through the information in order to allow investors to deliver a dramatic verdict on Monday morning.