Stress tests no quick fix for interbank lending

European stress test results could reduce funding costs for some banks but the need to rebuild credit lines could mean lending does not pick up significantly for some time. Analysts said the tests, if judged credible, would boost confidence between banks but a crucial next step would be for policymakers to act quickly to shore up those institutions in need of support.
The tests on 91 institutions are aimed at convincing markets that most of the region's banking sector can withstand another economic downturn and losses on government debt, and that authorities can deal with those that need recapitalising.
Banks' inability to lend has been at the heart of the global financial crisis. Some banks from countries such as Greece, Portugal and Spain, at the epicentre of the eurozone sovereign debt crisis, have been squeezed out of the interbank market on fears of counterpart risk, while funding costs have risen for others.
Financial markets are guardedly optimistic about the test results, with the major banks seen solid and just a few failures expected in Portugal and Spain, though lack of details has led investors to wonder whether the tests will be tough or transparent enough. "I'm not sure the stress tests will be the silver bullet by any means. They are just one piece in the puzzle," said Peter Chatwell, an interest rate strategist at Credit Agricole.
"Generally the more capital banks have, the better it will reduce counterparty risk. Transparency with regards to that topic would be helpful." Key for most investors is disclosure about banks' exposure to government debt from Greece, Spain and Portugal - countries that have struggled to convince lenders they can deal with their high debts in the face of slow economic growth.
Data released this week showed banks from those countries remained reliant on European Central Bank funding, with Greek banks' borrowing from the ECB up almost 5 percent at the end of June from the previous month. Borrowing by Portuguese banks reached a record 40.2 billion euros ($51.88 billion) in June. That trend is seen unlikely to reverse any time soon after the stress tests.