The results of eurozone banking stress tests on Friday should boost confidence in the sector to a degree but a long-term solution to the eurozone's debt crisis will be necessary for the interbank lending market to return to full functionality. Unsecured bank-to-bank lending remains moribund with few banks willing to lend for periods of more than a week, and the European Central Bank is still providing unlimited liquidity, a lifeline for banks from the eurozone's peripheral countries.
Up to 15 banks are expected to fail the stress tests, which the ECB and others hope will persuade investors that the EU is finally coming clean about the extent of its banks' problems. The checks will provide the first picture of the health of the region's banks since a previous round a year ago was deemed too lax. In that round, Ireland's banks were all given a clean bill of health - just months before their difficulties drove the country to seek an international bailout.
The new checks will gauge the impact on banks should the bonds they own issued by states such as Greece lose value. But the tests stop short of assessing the full impact of a country default. Three-month euro Libor rates were a tenth of a basis point higher at 1.55125 percent. The Eonia overnight rate fixed at 1.476 percent on Wednesday evening, the first day of the ECB's new maintenance period as banks parked cash at the central bank to frontload their reserve requirements.
The difference between the average reserve requirement and the amount left on deposit was around 35 billion euros, similar to levels seen at the beginning of May's maintenance period when tensions were running high on uncertainty over whether Greece would secure additional aid to avoid a debt default.