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How many European banks would pass US stress tests?

European banks would fail US stress test: Pro

As European banks gear up for tests to gauge their ability to withstand financial shocks, one analyst told CNBC that almost none of them would pass the U.S.'s tougher stress tests.

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European lenders face a wave of tests this year, with the European Central Bank (ECB) working in conjunction with the European Banking Authority to examine their ability to withstand another 2007-08-style crisis. A sample of 124 banks deemed "systemically important" will be tested, and results are expected in October.

While authorities have conducted regular tests since 2009, the 2014-round has been billed as the toughest, with European Central Bank (ECB) President Mario Draghi warning that some banks will fail. The tests are viewed as vital in clarifying the state of balance sheets and rebuilding investor confidence prior to the ECB taking on its new role as Europe's bank supervisor in November.

Lenders that could go under the microscope include Deutsche Bank in Germany, Santander in Spain, BNP Paribas in France and Barclays and HSBC in the U.K.

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Details of the tests will be revealed later this month, but it is known that banks will need to meet a threshold of 8 percent for "tier one" common capital — a measure of banks' core equity capital — for a "baseline scenario", and 5.5 percent for an "adverse scenario".

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The tests will follow ones conducted by the U.S. Federal Reserve, the results of which were published in March. The tests saw the Fed approve the capital plans of 25 banks, but object to those of five others, including Citigroup.

Daniel Lacalle of investment firm Ecofin said that despite the hype, the upcoming European tests were likely to be far laxer than their U.S. equivalents, due to more flexible definitions of what constituted "core capital". As a result, European banks that might hope to pass the local tests would be highly unlikely to pass the U.S. versions, in his opinion.

"Virtually no one would pass," said Lacalle. "In the U.S., core capital is capital. In Europe, there are a lot of other variances that underpin the analysis."

European banks have racked up their capital levels in preparation for the tests, raising around 80 billion euros ($110 billion) in 2013, and likely to raise another 60 billion euros this year, according to the Royal Bank of Scotland (RBS).

Read MoreEuro zone banks hoarding cash ahead of stress tests

However, Lacalle noted that in previous European tests, banks were allowed to include assets such as tax-deferred allowances — an amount that covers a reduction in future taxes payable — as core capital, which would not be allowed in the U.S.

In addition, definitions of non-performing loans were looser and banks could include sovereign debt as core capital, despite the heightened risk of default in countries like Greece and Cyprus.

Lacalle highlighted just two European banks he thought could pass the tougher U.S. tests — Santander and Deutsche.

"The big guys that have survived the crisis and have gone through big capital increases, for example, Santander, Deutsche — I think it would be a very big different for the very big banks that have met the new ratios through capital increases, rather than changing methodology."

Both Santander and Deutsche Bank said they was unable to comment on Lacalle's views.

However, the European Union's latest capital requirements directive, which is based on Basel III global standards on bank capital and came into force in July last year, states that deferred tax assets will no longer be eligible for common equity tier one status. This is part of various measures aimed at increasing the loss-absorption capacity of capital.

Lacalle said that irrespective, the European tests were likely to be easier to pass than their U.S. equivalent, due to the differing ways they draw up their balance sheets: U.S. banks value their assets on a "mark-to-market" basis while European lenders do it on an accrued basis. This makes the risk involved in certain assets less well-defined.

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He attributed Europe's more accommodating stance to the fact that banking represents a greater proportion of the economy than the U.S., meaning authorities needed to tread cautiously.

At 30.9 trillion euros, the euro zone banking system is smaller than at its peak, but still three times the size of the region's economy. By comparison, U.S. banks are worth roughly 100 percent of the U.S. economy.

"That imbalance in the weight of the financial system is a big driver of the difference in how Europe approach stress tests," said Lacalle.

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However, Alberto Gallo of RBS said it was hard to say how tough the upcoming European tests would be, as details were yet to be published.

"We don't know how the calculations are done, only the assumptions on the scenarios... We know very little about the ECB test also, so it's really speculation," Gallo, who heads European macro credit research, told CNBC.

He added that the treatment of sovereign debt was of decreasing relevance. "Only banks in Italy and Spain hold substantial amounts now," Gallo said via email.

—By CNBC's Katy Barnato. Follow her on Twitter: @KatyBarnato