July 16, 2010 / 11:24 AM / 10 years ago

Policymakers see no "catastrophes" in euro bank tests

PARIS/DUBLIN (Reuters) - Stress tests on European banks should not reveal any major problems among the big names, top officials said on Friday, saying the financial health check will be transparent and ease worries among investors.

“I get the feeling that what will come out will be rather reassuring, and that we’ll see that all the big European banks are sufficiently solid to resist any earthquake,” International Monetary Fund chief Dominique Strauss-Kahn told a French television station.

He said it was possible that some smaller banks would have to be recapitalized.

Jean-Claude Juncker, chairman of euro zone finance ministers, offered similar reassurance, telling Austrian newspaper Kurier in an interview: “I am not expecting any big catastrophes.”

Europe is testing 91 banks across 20 countries on how they would cope with another economic downturn and losses on Greek and some other government bonds.

Results will be released on July 23.

The aim is to restore confidence among investors by pinpointing any weak spots and forcing vulnerable banks to raise cash.

The tests are expected to show Spain’s cajas and German landesbanks, the regional lenders, are short of capital. Analysts have said each of those sectors could be shown to be at least $30 billion short of capital. Lenders in Greece and elsewhere may need to raise modest amounts, analyst estimate.

Irish banks have also faced severe problems but Ireland’s central bank chief said on Friday that the two biggest banks have already passed domestic stress tests more severe than tests being organized by the Committee of European Banking Supervisors across Europe.

Ireland’s financial regulator stress tested Allied Irish Banks ALBK.I and Bank of Ireland BKIR.I — the two Irish participants in Europe’s tests — earlier this year to prepare them for loan transfers to Dublin’s “bad bank” scheme.

Central Bank Governor Patrick Honohan said the Europe-wide tests had been extended to reflect troubles in the sovereign debt markets and would reassure them about the banks’ health.

“It is a good idea laying out the facts for the major banks. I think it will go some way to removing exaggerated concerns about some particular risks,” Honohan, a member of the European Central Bank’s governing council, told a news conference.

There are splits in the 27-nation EU about how severe to make the test and how much to divulge. It is not clear how big any “haircut” will be on government bond holdings, what the minimum solvency level will be and how long any failing bank will have to raise funds, or where back-up cash will come from.

Reporting by Yves Clarisse in Paris, Sylvia Westall in Vienna and Andras Gergely in Dublin; writing by Steve Slater, editing by Mike Peacock

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