Bank tests focus shifts to possible capital hikes

* Stress tests may lead to big capital hikes – Credit Suisse

* Euro zone ministers to focus on capital raising

* Analysts still have doubts on the scope of the tests

* Bank shares extend rally, up 10 pct since Monday

By Ben Berkowitz

AMSTERDAM, July 9 (BestGrowthStock) – European finance ministers
will shift their focus next week onto a possible need for their
banks to raise more capital and on who will cover any shortfalls
exposed by stress tests — a sum which Credit Suisse reckons
could total 90 billion euros ($114 billion).

Euro zone finance ministers, meeting in Brussels on Monday
and Tuesday next week, are expected to discuss the policy
response countries will take if the tests show problematic
areas, an EU source said. [ID:nLDE6670V9]

Underscoring the ongoing sensitivity of the issue, European
Central Bank President Jean-Claude Trichet on Friday reiterated
that the crisis was not over and that banks should remain open
to accepting help. [ID:nLDE668086]

German landesbanks could have to raise up to 37 billion
euros as a result of the stress tests that are being conducted
by industry regulators that measure the impact of a possible
further economic downturn on banks’ balance sheets, Credit
Suisse suggested in a research note.

Spanish savings banks would also need 12 billion euros in a
scenario where the economy weakened sharply and discounts were
required on sovereign debt, the note said.

But the real issue, the firm suggested, is not the banks’
performance in the testing but the ability of nations to
potentially provide more support for their banks. Some have
suggested European governments may have to tap mechanisms in the
euro bailout plan to fund any bank recapitalisations.

“The important point being tested is the ability and
willingness of the official sector to provide capital to firms
which fail the stress test – it is this, not the capital
position of European banks, which is the subject of severe market
uncertainty, in our opinion,” the note said.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on CDS for banks in test, click on: http://graphics.thomsonreuters.com/10/EZ_BSCDS0710.gif For Take a Look on stress tests, click on [ID:nLDE6601T6] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CRITICISM OF METHODS

The Committee of European Banking Supervisors said on
Wednesday it would test 91 banks across Europe to see how they
would hold up if the economy deteriorated and the banks had to
take haircuts on some sovereign debt holdings. [ID:nLDE6670BT]

Some 65 percent of the European banking sector will come
under the umbrella of the testing, the results of which are due
to be released on July 23. “Passing” would suggest a bank could
withstand the stress scenario, while “failing” would imply it
needs more capital to preserve core ratios in the scenario.

While CEBS has not published its full methodology what
details it has released have come in for criticism from analysts
and finance experts, who say the committee is not testing
anything like a worst-case scenario. [ID:nLDE6670FX]

Nonetheless there is already ample speculation that some
banks might not pass the test. Equinet analysts said Friday that
Postbank (DPBGn.DE: ) was at the highest risk of the German banks,
while Evolution Securities said Thursday it saw severe risk for
National Bank of Greece. (NBGr.AT: )

But sources close to Postbank said on Friday it was on track
to pass the tests. [ID:nWEA9067]

CEBS has hoped to take a page from the U.S. stress tests
conducted last year, which were designed to draw a line
underneath the sector’s troubles and sort out who needed what to
cover potential exposures to bad debts.

Those tests also boosted shares across the U.S. sector, and
European analysts hope for the same.

Since hitting a nearly four-week low on Monday, the Stoxx
600 European banking sector share index (.SX7P: ) has risen about
10.6 percent, while the FTSEurofirst 300 index (.FTEU3: ) is up
about 5.6 percent in the same period. On Friday the banking
sector index was 0.6 percent firmer.
($1=.7885 euros)
(Editing by Greg Mahlich)

Bank tests focus shifts to possible capital hikes