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Europe's banks brace for health check results

2011-07-15 12:04:13

LONDON (Reuters) - A health check of European banks is expected to show on

Friday that around 10 lenders need more capital to withstand a prolonged

recession, as criticism grew that Europe has been too slow to repair the

industry.

The International Monetary Fund warned Europe it is taking too long to rebuild

its banking system, and the threat that the Greek debt crisis could spread to

bigger countries such as Spain and Italy has rattled investors and dragged bank

shares to a two-year low.

Europe's so-called "stress test" will make 90 lenders reveal for the first time

their profit forecasts, a breakdown of their sovereign bond holdings and

funding costs, and will force the weakest to recapitalize.

Some banks moved to bolster capital ahead of the results, though it is too late

to affect them.

Austria's Volksbanken, which local daily Wirtschaftsblatt said earlier in the

day had failed the test, late on Thursday sold its eastern European arm VBI to

Russia's Sberbank, and Greece's EFG Eurobank said it was in talks to sell a

majority stake in its Turkish unit Eurobank Tekfen.

Volksbanken did not say how much it would raise from the sale, but banking

sources have said it could be around 590 million euros ($835 million). It helps

Volksbanken show it can shore up its balance sheet, while Greek banks are under

pressure to strengthen their capital to cope with the economic crisis at home.

The IMF said recapitalization of Europe's banks had been slow and lagged the

repair work done in the United States since the financial crisis.

Fears the crisis will spread to Spain and Italy have caused a jump in borrowing

costs for the countries and banks within them and prompted concern banks are

not resilient enough to cope with potential losses if the crisis deepens.

The European Banking Authority (EBA) will announce the results of the industry

health test at 1600 GMT.

A poll last month by Goldman Sachs of 113 investors, including long-only

investors and hedge funds, expected nine banks to fail the 5 percent core

capital pass mark in the face of a theoretical slide in stock, bond and

property prices during a two-year recession.

Most expectations now are for five to 15 banks to fail, but no large bank is

expected to fall short, and the total additional capital needed could be less

than 10 billion euros.

Banks that fail must produce firm plans by September on how they will plug

capital shortfalls by the end of this year, with their home state ready to step

in with taxpayers' money if need be.

Lenders that scrape through the test will also be expected to shore up their

capital buffers.

"It is action rather than analysis that is important. The regulators and the

banks already know who the weaker players are. The stress tests can confirm

that, but they will have no teeth unless followed up by restructuring and

consolidation of the financial landscape," said Nils Melngailis, managing

director at restructuring advisor Alvarez & Marsal.

This is the third, toughest and most comprehensive test of lenders in the

European Union since the global financial crisis, which began four years ago.

Investors and analysts will be given 3,000 data points on each bank, ranging

from profit forecasts to quality of capital buffers, compared with just 100

pieces of information last year.

Banks have already warned that investors will be unnerved by so much data on

sovereign debt holdings at a time when bonds of countries like Ireland and

Greece are in junk ratings territory.

The EBA says more transparency is better, allowing analysts to run their own

tests so they feel they have a complete snapshot of problem areas and to remove

some of the uncertainty that sent banking shares to two-year lows this week.

But there have been problems as the release date neared.

Germany's Helaba ruled itself out of the stress test after complaining that the

regulator's capital rules were too strict, and two Spanish banks that will fail

also blamed the regulator for being too strict on the use of capital that can

be included.

Euro zone sources told Reuters two weeks ago that 10 to 15 banks are likely to

fail the test, with casualties expected in Spain, Greece, Germany and Portugal.

($1 = 0.706 Euros)

(Reporting by Huw Jones and Steve Slater; Editing by Will Waterman)