11 European banks could fail stress test, report says

A report in the Spanish press that 11 European banks are about to fail stress tests imposed by the European Central Bank pushed the euro lower and caused turmoil on European stock markets.

The ECB is testing the health of Europes 130 banks with strict new rules on the capital they must maintain and their leverage on loans.

• EU banks $98B short of meeting Basel III capital rules
• Global regulators agree on bank asset rules

The official results of those tests arent expected until Sunday, but market watchers are already speculating about how many casualties there will be. Pimco's global banking specialist, Philippe Bodereau, expects at least 18.

The unconfirmed press report says three banks in Greece, three in Italy, two in Austria and one bank from each of Cyprus, Belgium and Portugal will fail their stress test.

While European investors are sanguine about companies in trouble in Italy and Greece, the news that financial institutions in Belgium and Austria may be struggling was a surprise.

The eurohit a one-week low of 1.26805 against the U.S. dollar. European stocks dove and then rose in a later trading.

ECB response

The ECBresponded to the report, saying it does not represent official findings.

The comprehensive assessment, which consists of an asset quality review and stress tests of bank balance sheets, is not yet completed. No final results have been sent to banks involved. The results will not be final until they are considered by the Governing Council of the European Central Bank on Sunday 26 October, after which they will be published. Until that time, any media reports on the outcome of the tests are by their nature highly speculative, the ECB said in a statement.

The ECB began buying bonds on Monday in an effort to inject stimulus into the European economy. That helped lift stocks Tuesday, as did a report that the bank was considering buying corporate bonds on the secondary market and may make a final decision as soon as December with a view to beginning purchases early next year.

Pimcos Bodereau said the banks that would fail the tests were weak regional lenders, but that many banks have improved their balance sheets since the 2008 financial crisis.

"It's pretty clear that not that many banks are going to fail it. A fair amount of balance sheet strengthening has taken place over the last six to nine months in anticipation of this exercise," Bodereau told Reuters.

The tests will put pressure on many more banks to improve, because they may pass by only a narrow margin, he said.

"Probably the market will ask questions about their dividend policies, about their ability to grow balance sheet, etcetera. They will be under pressure to remain quite conservative on capital management and on deleveraging," said Bodereau.