Published: Saturday, 26 Sep 2009 | 6:42 AM ET

Text Size

Twenty-two large banks in Europe may have accumulated credit losses of close to €400 billion for this year and next, according to officials who have seen a draft of conclusions of “stress tests” conducted by European regulators.

Sharon Lorimer City of London Dragon

At a meeting next Thursday and Friday in Sweden, European Union finance ministers are planning to publish at least one headline figure on banking health based on the results of the tests, the officials, who were not authorized to speak publicly, said Friday.

E.U. finance ministers are also planning soon to initiate a stress test for European insurance companies, with the results to be assessed in the spring, the officials said.

The bank tests in Europe were conducted by the Committee of European Banking Supervisors, or C.E.B.S., a pan-E.U. regulators’ panel based in London, which was assigned the matter by governments. The committee did not reply Friday to requests for comment.

The figure of almost €400 billion, or $580 billion, covers assumed bank credit losses rather than total bad assets, under a “negative” scenario in which macroeconomic forecasts, like growth in gross domestic product for this year and next, are lower than the forecasts of the European Commission, the officials said.

Other scenarios and elements of the testing process will not be released publicly, according to the officials.

Unlike a similar exercise carried out in the United States this year, the release of the European results will not include assessments of further action required by individual banks to bolster their balance sheets.

U.S. regulators released their stress test results in May, saying that 9 of the 19 largest U.S.-based banks were adequately protected, while the other 10 were ordered to raise a combined $75 billion as a buffer against potential losses. The U.S. process added pressure on Europeans to disclose their results.

In a brief statement in May, the committee confirmed that it was “carrying out an E.U.-wide forward-looking stress testing exercise on the aggregate banking system” based on common guidelines and scenarios. It said it would not identify individual banks that might need recapitalization, and that it was the responsibility of national governments to name such banks.

“In terms of the better visibility of the fiscal costs of the bailouts, it will be positive to publish the results,” said Hans-Joachim Dübel, a banking expert at Finpolconsult in Berlin. “But we know that the problem is with certain banks, and a global figure doesn’t help us with that.”

Peer Steinbrück, the German finance minister, had previously signaled his reluctance to release findings of stress tests. One reason, according to Mr Dübel, is that German politicians are worried about the extent of the troubles at the German Landesbanken, or state lenders.

One E.U. regulator, who had a central role, said Friday that the exercise of conducting the stress tests — a first on this scale in Europe — had been very positive.

“It was a big learning process,” said the official, who was unauthorized to speak publicly. “But we now know better how to do this in future. There is a centralized command.”

The International Monetary Fund will publish its own forecast of bank health Wednesday as part of its Financial Stability Review. The fund estimated in April that European banks still required $375 billion in capital to cover losses, compared with $275 billion for U.S. lenders. That forecast caused some consternation among European officials, who had not been informed of its release and were unclear on the methodology.

The stress tests for European insurers will be conducted by the Frankfurt-based committee of European insurance and occupational pensions supervisors, according to E.U. officials.

With their more conservative investment strategies, insurers — with the notable exception of the U.S. giant American International Group

AIG loading...

Quote  |  Chart  |  News  |  Profile

[AIG  Loading...      ()   ] — generally steered clear of the most toxic structured products that brought a number of Western banks to their knees last year.

But unlike banks, many insurers are now suffering from the record-low level of interest rates in the major economies. This had dented their returns from investments like bonds, while they have fixed obligations in the form of policy payouts.

Print

Email

Text Size