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Eleven Banks Will Fail EU Stress Tests: Strategist

Wednesday, 14 Jul 2010 | 8:20 AM ET

Eleven banks including Germany's Commerzbank and Italy's Banco Popolare will fail the European Union's stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.

"We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank and Sabadell," a report from Macquarie Securities said.

Even though the number of banks likely to fail the test is relatively small, it may not allay fears on the health of the overall European banking sector, the note said.

Of the 46 listed banks being tested by the EU, only eleven will have insufficient capital, but of the total 91 banks, including non-listed banks, the number will be greater, Roccati said.

"The key concern and the key differentiating factor is actually the cost of credit and not the decrease in revenues due to a slowdown of the economy," he said.

European banks may need a minimum of 6 percent tier-1 capital ratio in order to pass the stress tests, according to a Dow Jones report Wednesday. Roccati pointed out that the current regulations require a 4 percent tier-1 capital ratio.

Banks that do fail the stress tests may have some breathing space in which to raise capital as they are unlikely to need to issue debt in the very short term, according to Roccati.

Which Banks Will Fail Stress Tests?
Eleven out of the forty six banks tested by the EU stress tests will fail, including Italy's Banco Popolare and Germany's Commerzbank, Alessandro Roccati from Macquarie Securities told CNBC Wednesday.

If the troubled banks can't recapitalized themselves or be funded by their sovereign governments, it will fall to the EU's central backstop fund to bail them out, he said.

Given the concerns over the sector, Macquarie said he favors BNP Paribas, UBS, SEB, DnB NOR, Nordea, and Erste Bank. Macquarie recommended caution on Iberian and Greek banks.

- Watch the full interview with Alessandro Roccati above.

Banks