Business

Stress tests: Not many dead

BBC business editor Robert Peston on the European banks' stress tests

On the face of it, the results of the health checks on Europe's banks are good news.

Only seven banks - all of them fairly small - flunked the tests of whether they're strong enough to withstand further financial shocks.

And those weaker banks, which are in Greece, Spain and Germany, need a mere 3.5 billion euros (£3bn) of new capital to meet meet the standards required by regulators.

That's not really going to test the ability of either European taxpayers or investors to provide equity finance.

So regulators will claim that the European Union's financial institutions are in better shape than many investors and creditors believe.

But some will argue that the tests simply weren't demanding enough.

What was measured was whether the 91 banks have enough capital to absorb the losses that would be generated if the European economy slowed down by 3% compared with the EU's official forecast and if the price of government bonds fell by 23% for Greece, 10% for the UK and 4.7% for Germany (among others).

The problem with these scenarios is that the real world could turn out much worse. The Greek government could in theory default on its debt - which would lead to much bigger losses for banks.

And, of course, the European Union could fall into a much worse recession.

Also there are those who believe that the regulators have been unduly kind to banks - especially French and German ones - by allowing them to count as capital certain liabilities that in practice are useless at absorbing losses.

So it's very unclear whether banks' creditors will be reassured or unsettled by the stress test results.

The weekend will be an anxious time for banks, as they wait to learn whether it'll become easier or harder for them to borrow, when markets open on Monday.

This is a version of my post of 1613, updated with more detail.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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