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Europe markets close lower as banking stocks drag

European shares closed lower on Wednesday, hit by plans for new, tougher stress tests for euro zone banks from the European Central Bank (ECB).

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FTSE
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CAC 40
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IBEX 35
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The FTSEurofirst 300 Index provisionally closed lower by 0.7 percent at 1,278.47 points, after gains in the previous nine sessions. The FTSE 100 closed down 0.5 percent while the French CAC 40 closed down 1 percent.

Europe stress test

The central bank announced that large banks will undergo risk assessments, asset quality reviews and stress tests. The exercise - which will start in November and take 12 months - aims to foster transparency, repair and build confidence.

The ECB added that the assessment will be based on a capital benchmark of 8 percent common equity Tier 1 - a measure of the capital buffer each bank would need to have in place in the future.

(Read More: ECB's Draghi: New bank stress tests 'just the beginning')

ECB President Mario Draghi told CNBC that the mistakes made by Europe's banks – and the damage they caused to the euro zone economy – must never be repeated. He said the latest round of stress tests for banks were "just a beginning" in ensuring the financial sector was on a stronger footing and would not jeopardize government finances again.

"What's been done in the past must not be repeated again…Things have improved in the banking industry but no, this is not a final point. It's just a beginning of a new way of doing things," he said in an interview with CNBC.

"I insist that the primary objective of this exercise is transparency."

(Read more: ECB sets tests to strengthen Europe's banks)

"While today's announcement will be a first attempt by the ECB to demonstrate the credibility of the exercise, the proof of the pudding will be in the eating," Chris Scicluna, an economist at Daiwa Capital, said in a morning note.

"Unless it prompts significant capital-raising activity, which itself might well add to the fiscal burden for pressured sovereigns, the suspicion will persist that this latest effort at a European bank health-check will be no more convincing than the previous impotent efforts."

Banking stocks fell by 1.8 percent with nearly all lenders posting losses. Spanish lender Bankia fell by 5.62 percent, HSBC was down 1.44 percent and Deutsche Bank was lower by 2.32 percent.

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(Read More: March 2014 most likely date for tapering: Goldman)

In Asia, Japanese and Chinese equities skidded over 1 percent each on Wednesday afternoon as investors engaged in profit-taking on strong gains in the past week. Japan's Nikkei and the Shanghai Composite hit new one-week lows, South Korea's Kospi and Australia's S&P ASX 200 moved off their respective multi-year peaks and Indian stocks fell half a percent.

(Read More: Japan and China stocks lead Asia lower in sudden sell-off)

BoE minutes

In the U.K., the Bank of England released the minutes of its latest monetary policy meeting which decided to keep rates unchanged at record lows. The report showed that policymakers at the BoE said that unemployment in the U.K. appears to be falling slightly faster than forecast against a backdrop of stronger-than-expected growth.

"It now therefore seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report," the minutes revealed.

(Read More: BoE sees unemployment falling faster than forecast)

The fallout from the LIBOR scandal continued on Tuesday evening. Dutch lender Rabobank could face around a $1 billion fine next week from regulators after allegations that the bank helped to manipulate the interbank lending rates, according to the Financial Times.

(Read More: Rabobank faces near-$1 billion Libor fine)

Berlusconi back in the news

An Italian justice system official reported to Reuters that an Italian court had ordered former Prime Minister Silvio Berlusconi to stand trial for corruption. Naples prosecutors accuse Berlusconi of bribing a former senator to switch party allegiance as part of an attempt to bring down the government of Romano Prodi in 2006.

Italy's FTSE MIB closed down 2.4 percent on the news.

Stocks news

In other stocks news, shares in online retailer ASOS fell 2.5 percent despite a reported jump of 23 percent in its full-year profit. However, shares in the U.K. firm have rallied 95 percent so far this year.

(Read More: Next stop China...then the rest of the world: Asos CEO)

GlaxoSmithKline's drug sales in China tumbled 61 percent in the third quarter, hit by a bribery scandal. Worldwide, GSK's sales were flat at 6.51 billion pounds ($10.6 billion). Shares in the firm closed down 1.9 percent.

Shares of STMicro provisionally closed down 9.5 percent on Wednesday after Europe's biggest semiconductor maker posted a third-quarter net loss.

(Read More: China focus for STMicro as shares tumble 6.5%)

Meanwhile, Dutch brewer Heineken cut its full-year guidance due to a lack of demand in some of its markets; shares closed down 4.45 percent.

(Read More: Heineken cuts 2013 profit forecast after weak quarter)

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