Pain ahead for banks in Spain, says paper

MADRID: Several of Spain's 18 savings banks, including some involved in recent mergers, have failed to pass tests to see how strong they would be if economic circumstances were more adverse, El Pais newspaper reports.

The Bank of Spain is due to publish the results of so-called stress tests today and similar tests will be published across Europe.

The tests had been expected to show that some of the unlisted savings banks would need a capital injection under certain scenarios.

The newspaper said a small group of savings banks would need more capital if economic conditions were to worsen severely and there were a sovereign debt crisis in several countries.

Among these, some have already received funds from the Spanish State's Fund for Orderly Bank Restructuring

Experts fear that bad news across Europe could badly hurt markets again, while too rosy a picture may prompt investors to think the tests weren't rigorous enough.

Marco Annunziata, chief economist at UniCredit Group in London, criticised "the recalcitrant and rather secretive way in which [the exercise] has been prepared".

"The silver lining, however, is that this should have served as pragmatic expectation management: very few investors now expect the European stress tests to provide a silver bullet," he said.

"The scope for disappointment should therefore have been reduced."

Europe's debt crisis has already forced Greece to take a €110 billion ($195 billion) international bailout to avoid bankruptcy, and pushed governments to put up a €750 billion backstop for troubled governments if they need it.

Early reports from Ireland suggest the Bank of Ireland and Allied Irish Banks, the country's two biggest banks, are both set to pass the European Union's stress tests on the region's lenders, said a source.

Bank of Ireland's €2.9 billion fundraising last month gave the lender enough capital to meet the threshold set by EU regulators, said the source who said the talks were private.

Allied Irish, the second-biggest lender by market value, passed because regulators included in their calculations the €7.4 billion the bank plans to raise by the end of the year.

Under the tests, banks will be required to have a Tier 1 capital ratio, a key measure of financial strength, of at least 6 per cent next year.

Firms that fail to meet the standard will be required to raise capital.

Whereas US banks were required to raise an additional US$75 billion ($103 billion) following stress tests conducted by the US authorities, which saw banks such as Citigroup fail to pass, few think such an outcome is likely today.

- AGENCIES