Daniel Roland, File, Associated Press
FRANKFURT, Germany — Ninety European banks get their test results back Friday, as regulators seek to increase transparency and convince the markets that the continent's financial system can withstand big shocks like a possible Greek debt default.
After a similar test last year was widely considered a failure for being too lenient, the European Banking Authority is this time walking a fine line between being tough enough to be believable and not rattling nervous markets with more bad news.
The publication of the test results is supposed to reduce the uncertainty hobbling markets by showing which banks hold how much in bonds issued by Greece and other shaky eurozone governments.
The exercise aims to publicly identify weak banks so national regulators can push them to strengthen their finances. There is a risk, however, that investors may target the shaky banks if they consider they have not done enough to strengthen their finances.
Banks are a key part of Europe's debt crisis because they hold billions in bonds from financially troubled governments. A default or other losses on those bonds could hurt banks and choke off credit to businesses — creating a credit crunch like that after the 2008 collapse of U.S. investment bank Lehman Brothers.
Estimates of the number of European banks that might fail run as high as 15, compared with only seven that flunked last year's test. The 2010 stress tests were regarded as a failure after Irish banks that passed had to be bailed out only weeks later.
Banks this time must show they can maintain adequate resources to absorb unexpected losses even during an adverse scenario in which growth falls 4 percentage points short of European Union estimates in 2011 and 2012. That comes out to a fall in gross domestic product for the 17-member eurozone of 0.5 and 0.2 percent.
The gloom-and-doom scenario also includes a fall in real estate, stocks and the U.S. dollar.
One key new measure will be detailed information on how much each bank holds of shaky government bonds from Greece, Portugal and Ireland — by country, amount and bond. All three countries are currently depending on bailout loans from the European Union and the International Monetary Fund and cannot borrow normally, raising the question of how they are going to roll over their debt in coming years.
The big question, analysts say, is whether governments and banks act on the results by taking painful steps such as raising capital. Asking private investors for more money can dilute shareholdings, and therefore can weigh on stock prices; banks that can't get new capital from markets may have to turn to governments.
"What we would hope is that governments come forward with clear plans to aid failing banks, or banks that are nearly failing, and so far we haven't heard much about that," said Marie Diron, senior economic advisor for Ernst & Young.
She said estimates that around 15 banks could flunk sounded right. "Most of these would be in Spain, Greece and the countries under highest pressure, but some, I would think, as well in some of the core eurozone countries and that is where governments are least ready to tackle the issue."
Ahead of the results, three Greek banks announced measures that could boost their finances. Alpha Bank's shareholders on Friday gave management the green light to raise more capital by issuing new shares, while Eurobank EFG said it was reviewing what to do with its Turkish subsidiary, Eurobank Tekfen.
The third, Piraeus Bank, said UK-based Standard Chartered had expressed interest in possibly purchasing its Egyptian unit and that the discussions were also exploring "a wider strategic relationship" in several areas.
More such announcements are expected by banks in other countries with weak banking sectors, such as Spain, and will be key in boosting market confidence.
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