EU plans stress test on banks

BRUSSELS, Belgium — European Union countries on Tuesday pledged “maximum transparency” when they publish the results of stress tests that will show how the region’s banks would fare if the economy worsens sharply.

BRUSSELS, Belgium — European Union countries on Tuesday pledged “maximum transparency” when they publish the results of stress tests that will show how the region’s banks would fare if the economy worsens sharply.

The results of the simulations will be closely watched by markets worried that European governments could face extra costs for rescuing troubled banks as they struggle with mounting debt and slow economic growth.

Belgian Finance Minister Didier Reynders said EU finance ministers agreed at talks that banking supervisors would publish details on banking groups on July 23, following up two weeks later with details on subsidiaries.

The stress tests on Europe’s 91 banks — ranging from major lenders to small Spanish saving banks — would show how much they would lose if the economy worsens sharply, financial market conditions deteriorate and borrowing costs soar.

The tests will also examine banks’ exposure to European government debt and the quality of the capital they currently hold against risks — the so-called Tier 1 capital ratio that is a measure of a bank’s health and ability to counter risk.

The August figures could also show up any problems banks face with units in eastern Europe. Sweden’s banks lend widely in the Baltic countries and Austria’s banks are heavily involved in central Europe and the Balkan region.

The results could force any troubled banks to shore up their finances — potentially reassuring investors not convinced that EU nations’ massive “shock and awe” euro750 billion (US$948 billion) rescue package would halt a debt crisis.

According to a report from PricewaterhouseCoopers, German banks jointly have more non-performing loans than lenders elsewhere in Europe, with some euro212.6 billion at the end of 2009. British banks had euro155.1 billion in non-performing loans, with Spain’s smaller banking sector carrying some euro96.8 billion.

Reynders vowed that governments wouldn’t hold back details of embarrassing losses at some banks, saying the 27 country bloc is committed to “the maximum transparency” and EU countries are readying themselves “to act if necessary” to recapitalize troubled banks.

British treasury chief George Osborne said the test has to be seen as credible.

“The public needs to feel that they’ve received the appropriate amount of information, that there’s been a legitimate stress tested, that the commitment made to look at sovereign debt exposure has been met,” he said.

Europe should learn from the U.S. stress tests last year that the government’s ability to stand behind any vulnerable banks is crucial and “would be an important part of a successful stress test on July 23,” he said.

EU Economy Commissioner Olli Rehn said banks should first seek financing from markets or from shareholders and should then turn to their country’s financial backstops — such as Spain’s bank rescue fund.

Only as a last resort should countries turn to a new, euro440-billion financial stability fund for the 16 countries that use the euro that would require countries to accept conditions, such as restructuring the banking sector, he said.

“I am confident that this will not have to be used but in any case we have this option,” Rehn said. “The European banking sector is strong and resilient overall.”

Slovakia is currently holding up the final clearance of the new fund because its new government said it wants to negotiate further on how much the country would contribute.

Slovakia’s new prime minister, Iveta Radicova, said in a statement she did “not intend to block a political agreement to create a eurozone rescue package” but wanted more reforms before she would sign.

She says she wants “a binding agreement from the eurozone to carry out necessary reforms” because it was “unacceptable” for taxpayers to carry the full cost of any rescue. She will hold talks with EU officials on her demands on Tuesday and Wednesday.

Slovakia’s failure to sign wouldn’t prevent the financial stability fund from raising money from markets to fund any eurozone bailout if needed. The fund’s chief, Klaus Regling, said Monday that the fund could start raising rescue money “if required, almost immediately.”

EU countries also agreed to some changes over the structure and responsibility of new financial oversight agencies due to be set up at the end of this year. The changes are an effort to compromise with EU legislators, who will vote in the fall on the new agencies and want to give them wide powers to settle disputes between countries.

Osborne said governments would push for more limited powers for the new regulators. That would prevent them from issuing orders that would affect national budgets — such ordering a bailout of a risk bank.

He said European banking, insurance and market supervisors should only overrule national authorities when they or a financial player is breaking EU law.