European regulators’ stress tests on 91 of the region’s banks are in practice assessing government bailout systems rather than the lenders themselves, analysts at Credit Suisse Group AG said.
“Although exercises looking at the sensitivity of individual banks are not wholly without value, they are largely missing the point,” analysts led by Daniel Davies wrote in a note to clients today. “Everyone can do arithmetic on balance sheets. The information that the markets need is whether there is a well-organized and well-capitalized structure in place to recapitalize the failures.”
Five or six Spanish savings banks may fail the tests and need as much as 12 billion euros ($17.4 billion), the analysts said. That would require the Spanish bailout fund, known as FROB, to borrow additional money in the six months after the results, the analysts said. The fund has about 12 billion euros in cash, and can boost its capacity to about 99 billion euros.
European regulators are seeking to assuage investor concern that banks in the region are inadequately capitalized with a second round of stress tests. The European Banking Authority toughened this year’s tests after the 2010 assessments showed seven banks had capital shortfall totalling 3.5 billion euros, a 10th of the lowest analyst estimate.
“What the stress tests need to deliver is proof that the new European financial infrastructure can be made to work in a real-world test,” the analysts wrote. “This can only be done by finding some banks in Europe to be in need of capital, and then recapitalising them: precisely what was not done in 2010.”