European bank stress tests: Your guide

Europe's banks will find out whether they have passed their health checks this Sunday when the European Banking Authority (EBA) and the European Central Bank (ECB) announce the results of two separate tests on the financial industry's ability to withstand economic shocks.

Here's a CNBC guide on what you need to know about Europe's bank stress tests.


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What do all the acronyms mean?

The EBA is a banking regulator created by European authorities following the financial crisis, whereas the ECB is a central bank (naturally), and has been around a lot longer, but is just about to take over as single supervisor of the European banking system.

Read More11 banks to fail European stress tests: Report

The EBA has been testing 123 banks in the European Union – the 18-member euro zone and the 10 non-euro countries -- measuring how well lenders can weather differing degrees of economic downturn. The EBA tests are checked by the ECB in the case of euro zone banks, or the country's own central bank when it is outside the euro zone. In the U.K., the Bank of England will also conduct its own stress tests, with provision for bigger property losses – the results will be announced in December

Simultaneously the ECB has been focusing on the quality of 130 banks' assets.

On Sunday, the two sets of results – the ECB's Asset Quality Review (AQR) and the EBA stress tests – will be released as a Comprehensive Assessment (CA).

What will happen?

Europe's 123 biggest banks will be run through a series of worst-case economic scenarios, to see if their balance sheets are healthy enough to withstand further economic shocks. The ECB will also assess how the euro zone banks value their assets through the AQR, which banks outside the euro zone won't have to submit to.

This is not the first time Europe's banks have been stress-tested. However previous tests have been were widely discredited as toothless when they passed several banks which then had to be rescued by governments as soon as the economic climate turned sour. It was the cost of propping up these banks that contributed to pushing countries like Spain close to collapse. For the current tests to look credible, some of the banks have to fail.



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Which banks are at risk?

This is the billion-euro question.

Banking analysts are forecasting 10-14 will not make it – with "unlisted German, smaller Italian, Portuguese, Greek and eastern European banks" the biggest concern by geography, according to analysts at Berenberg.

Read MoreHow many European banks would pass U.S. stress tests?

Those most frequently mentioned as in danger include Ireland's Permanent TSB and Austria's Volksbanken, both of which have been bailed out by their respective governments already. HSH Nordbank, a German Landesbank which has a large shipping business, is also at risk if there is a writedown of its shipping assets. Some Dutch banks' property lending portfolios are also a cause for concern, according to credit analysts at Lloyds.

Spain's Banco Popular Espanol, Germany's Commerzbank, and Unicredit, Italy's largest bank by assets, are also in a difficult position, although opinion is divided on whether they will make it through the tests. Commerzbank and Unicredit have been selling off riskier assets this year ahead of the tests.

What happens next?

Banks which fail the tests will have up to nine months to get their houses in order, either through selling off assets or raising capital. Any shock bad results in France and Germany – long considered the stable core of the European economy -- will be felt in Europe's stock markets.

Read MoreFull scope of Europe's bank stress tests revealed

In the medium term, the ECB may move closer towards quantitative easing, once the stress tests are out of the way. The bank may also decide to run the stress tests annually.

CNBC will be broadcasting live from Frankfurt this Sunday at Midday CET as the results of the stress tests are announced. We'll also be live-blogging as the results come in.

- By CNBC's Catherine Boyle