European Banks Higher After CEBS Details Stress Tests

By Maarten van Tartwijk Of DOW JONES NEWSWIRES AMSTERDAM (Dow Jones)--European banking shares opened higher Thursday after Europe's banking regulator gave the first details of stress tests that will examine how the sector would stand up to a renewed financial crisis. The tests will look at how heavy losses at European banks would be if European economies pitch back into recession and in the face of a "sovereign shock" that would generate losses on banks' government bond portfolios. According to a statement from Committee of European Banking Supervisors released late Wednesday, the London-based body that groups the EU's national authorities, the tests will examine an "adverse scenario" in which European growth is 3 percentage points of GDP slower than current EU forecasts over the next two years. Investors, who were keenly awaiting the statement, welcomed the update when European markets opened. Some of the European banks worst hit during the financial crisis gained sharply in early trading, extending gains made late Wednesday when the markets were anticipating a statement from regulators. U.K. banks were among the main gainers. At 0738 GMT, Royal Bank of Scotland Group PLC (RBS) was up 4% at 45 pence, Lloyds Banking Group PLC (LYG) gained 4% to 61 pence, Barclays PLC (BCS) was up 3.6% at 302 pence. French-Belgian bank Dexia SA (DEXB.BT) was up 3.6% at EUR3.17. France's BNP Paribas SA (BNP.FR) was up 3% at EUR49.40 and Societe Generale SA (GLE.FR) rose 3.2% to EUR38.77. The French banks are reportedly heavily exposed to sovereign debt risk. Germany's Deutsche Bank AG (DB) was up 2% at EUR48.41, while Commerzbank AG (CBK.XE) increased 1.9% to EUR6.33. The Stoxx Europe 600 bank index was up 1.8%. Credit Suisse said it was positive that a stress test is taking place, although "we doubt that [the tests] would be announced if they were going to disappoint the market." The bank said that European governments are facing the main challenges. "The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test," Credit Suisse said. "It is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion," it added. European governments are hoping the stress tests will settle uncertainty about the health of Europe's banks that have been heightened by the fallout from Greece's debt crisis. Banks remain highly dependent on funds provided by the European Central Bank. To calm market concerns, analysts say the tests need to be credible and transparent and should be followed by plans to recapitalize banks whose capital cushions fall short. However, the CEBS didn't release much detail about the tests, even what it would regard as a satisfactory minimum capital base for banks. SNS Securities analyst Maarten Altena said: "We are not really convinced by the quality of stress test related to sovereign debt haircuts. The expected proposal largely assumes an impairment to current market values instead of a further stress scenario," he said in a note to investors. -By Maarten van Tartwijk; Dow Jones Newswires; +31 20 571 5201; maarten.vantartwijk@dowjones.com (Stephen Fidler and Carolyn Henson contributed to this article.) (END) Dow Jones Newswires July 08, 2010 04:12 ET (08:12 GMT)