In an attempt to quieten down worries about the state of the European banking system the EU is doubling the number of banks to be stress tested to 120.
According to the Wall Street Journal (WSJ) the banks will also be subjected to the controversial test of whether they can withstand a sovereign debt default. This is a tough call as the EU has consistently said this is an impossible scenario. More banks from more countries will be involved in the tests this time.
The results should be available by the latter half of July and, in response to a summit decision on 17th Jun, will spell out the position institution by institution. This is in stark contrast to the last set of results from 22 banks when the results were aggregated with the result that weaker banks were protected. This resulted in not only criticisms of lack of transparency but also that the tests did not reflect the differing economic situation in each member state.
Angela Merkel, the German Chancellor, says that her country is ready to further capitalise banks if necessary and that other countries should be prepared to do the same. "Given the current uncertainty in financial markets, more transparency can restore trust. But building trust will only work if every country also shows how it will handle the results—for example, by recapitalizing its banks if necessary." She told the WSJ.
The WSJ points out that a study by PricewaterhouseCoopers puts German banks as the most exposed to toxic loans with some $261 billion in ‘nonperforming loans’ on their books.