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EU agrees key criteria for testing health of banks

European Union governments have agreed the key criteria of stress tests for the bloc's banks, EU sources said today, and senior policymakers voiced optimism about their results.

world Updated: Jul 16, 2010 18:36 IST

European Union governments have agreed the key criteria of stress tests for the bloc's banks, EU sources said on Friday, and senior policymakers voiced optimism about their results.

Under the agreement, each of the 91 banks being tested will publish its result at 1600 GMT on July 23, and the London-based Committee of European Banking Supervisors (CEBS) will issue a statement summing up the outcome a minute later, several sources said, asking not to be named.

The main criterion will be to have a certain minimum core tier 1 capital, a measure of banks' financial strength, in hypothetical adverse economic conditions. One source said banks would need a level of more than 6 percent to pass the test.

Exposure to sovereign debt risk will be the second indicator in order of importance.

The final details of the tests will be discussed on July 22 at a teleconference of senior finance ministry officials from EU countries and representatives of the European Commission and the European Central Bank.

Reassuring noises

International Monetary Fund chief Dominique Strauss-Kahn said the tests should not reveal any major problems among the big names, although it was possible that some smaller banks would have to be recapitalised.

I get the feeling that what will come out will be rather reassuring, and that we'll see that all the big European banks are sufficiently solid to resist any earthquake," he told a French television station.

Jean-Claude Juncker, chairman of euro zone finance ministers, offered similar reassurance, telling Austrian newspaper Kurier in an interview: "I am not expecting any big catastrophes."

Europe is testing banks across 20 countries on how they would cope with another economic downturn and losses on Greek and some other government bonds.

The aim is to restore investor confidence by pinpointing any weak spots and forcing vulnerable banks to raise cash.

The tests are expected to show Spain's cajas and German landesbanks, the regional lenders, are short of capital. Analysts have said each of those sectors could be shown to be at least $30 billion short of capital. Lenders in Greece and elsewhere may need to raise modest amounts, analyst estimate.

Irish banks have also faced severe problems but Ireland's central bank chief said on Friday that the two biggest banks there had already passed domestic stress tests more severe than tests being organised by the Committee of European Banking Supervisors across Europe.

Ireland's financial regulator stress tested Allied Irish Banks and Bank of Ireland - the two Irish participants in Europe's tests - earlier this year to prepare them for loan transfers to Dublin's "bad bank" scheme.

Central Bank Governor Patrick Honohan said the Europe-wide tests had been extended to reflect troubles in the sovereign debt markets and would reassure them about the banks' health.

"It is a good idea laying out the facts for the major banks. I think it will go some way to removing exaggerated concerns about some particular risks," Honohan, a member of the European Central Bank's governing council, told a news conference.

EU sources would not discuss whether there was agreement on the size of the "haircut" for government bond holdings and how long any failing bank will have to raise funds.