One of Europe's top central bankers sought on Tuesday to allay concern that a health check of Europe's lenders was too soft, while three successful debt auctions suggested fears of sovereign meltdown were easing. ECB Governing Council Member Ewald Nowotny's defence of bank stress tests came as a German bank lobby said the regional landesbanks would pass, and upbeat comments from officials in France.
Greece and elsewhere raised concerns the process may not be tough or transparent enough to restore investor confidence in Europe. "I think they are strict and serious. I observe that some groups have a tendency to raise doubts which is completely unfounded," Nowotny told Reuters Insider in an interview.
"What we have now is an organised stress test and then we have the government reaction to these results ... then at the ECB we will have to look how markets are developing and then we will have to act accordingly." Europe's assessment of how 91 banks would cope with another economic downturn aims to restore market confidence after the Greek crisis sparked fears the eurozone could unravel and leave banks nursing major losses on government debt.
But while premiums remain high, successful debt auctions by Ireland, Spain and Greece on Tuesday showed fear of a sovereign debt meltdown in the eurozone were easing and stress tests being published on Friday were expected to give Europe's top banks a reasonably clean bill of health.
In the first known failure of the stress tests, Germany's nationalised Hypo Real Estate was expected to fall short, a person familiar with the matter said on Monday. But since Hypo is already being recapitalised with state funds, some analysts said that allowing it to fail would bolster the credibility of the stress tests without posing any additional risks to Germany's banking system.
"When it was announced a few weeks ago, it was very positive, the feeling was it would add transparency to the sector as a whole," said Emily Adderson, fund manager of the Henderson Global Financials fund. "However, as we get near to it and with rumours and information coming from banks' management saying they are going to pass the test, the fear is that it is not going to be too stressful."
Investors and analysts have grown more sceptical of the process in the past week, fearful that it will fail to match last year's US bank stress test, which forced 10 big banks to recapitalise and restored market confidence.
Splits within the 27-member European Union over how to model the tests and how much information to divulge have already undermined confidence in the process. EU officials have agreed on the key criteria, but analysts now fear that they will be inconsistently applied, with national regulators differing on what qualifies as core capital, for example.
Ratings agency Fitch Ratings said it expects capital will be made available by governments where banks fail the tests and are unable to raise funds publicly. It said a greater concern was that funding conditions remain tough for some banks, and pressure on those most exposed to wholesale refinancing risk could intensify if the stress tests do not improve wholesale funding markets.
Major listed banks, which face constant investor scrutiny, are expected to pass, but analysts say the tests may expose problems with smaller, largely unlisted, players such as the landesbanks and Spain's regional savings banks, or cajas.
They say there need to be some failures among the six Greek, 27 Spanish and 14 German banks being tested to render the evaluation process credible. "The hope is that the test will calm the market a little bit and it would require at least some banks to be flagged as having insufficient capital at the moment," said Lukas Daalder, strategist at fund manager Robeco.
Barclays Capital analysts estimate the capital needs of Spanish cajas at 36 billion euros, with 34 billion euros needed for Germany's landesbanks and 8.6 billion euros for Greek banks. Yet officials from Greece, Spain and Germany have been upbeat on their banks' prospects.
The president of the German Association of Public Sector Banks told Reuters on Tuesday there was no indication any of Germany's public sector landesbanks would fail. Deutsche Bank, Commerzbank and Deutsche Postbank are not seen to be in any danger of needing to recapitalise, sources close to the banks said.
Others, including officials from Britain, Belgium and France, have also voiced confidence, while Poland's central bank governor, Marek Belka, said he was not worried about the country's top bank PKO BP. French Economy Minister Christine Lagarde said she was "confident" about the results of the bank stress tests, but declined to elaborate.