UPDATE 3-Europe shores up support for bank stress tests

* 91 banks to be tested for economic, market shocks

* Sovereign risk shock criteria compared to May lows – CEBS

* Worry that test assumptions not “stressed” enough

* European bank shares up 1.8 pct, in line with markets

(Adds estimates on possible govt bond losses)

By Steve Slater

LONDON, July 8 (BestGrowthStock) – European supervisors won
tentative support for impending bank stress tests on Thursday,
while markets sought more detail about the process before
delivering a final verdict.

Regulators are aiming to restore trust among bank investors,
in the same way that U.S. stress tests last year helped draw a
line under problems there, publishing a list of 91 banks subject
to the tests late on Wednesday.

The Committee of European Banking Supervisors (CEBS), tasked
with running the tests, said it would test banks’ resilience
assuming economic growth 3 percent below official EU forecasts.

“The good news is twofold,” said Pascal Decque, analyst at
Natixis, as the “very wide scope” of the tests, including
unlisted banks in Spain and Germany, would give a broad picture
of the health of the banking system. “That’s good news one.”

“Good news two is that it will be published on a
bank-by-bank basis as well, and you will have the ability to see
each name,” he added.

On the “bad news” news front, however, was the lack of
detail on exactly how much of a “haircut” each bank would need
to take on the sovereign debt they hold, he said.

European bank shares rose roughly in line with overall
markets, in a sign the test criteria were not worse than markets
had been expecting.

European investors have been shaken by worries about
sovereign debt losses, more bad debts and doubts about the
health of the unlisted bank sector. [ID:nLDE6670FX]

The European test, whose results will be released on July
23, will include losses on some government bonds based on a
deterioration of market conditions to worse than the situation
observed in May. [ID:nLDE6661JE] [ID:nLDE6662AJ]

The scale of markdowns on sovereign debt is all-important,
however.

A markdown of Greek debt would be 16 to 17 percent off the
market price, German industry sources said before the CEBS
statement, adding there would be no markdown on German bonds.

“Stress should be a worst case scenario and this is not a
worst case scenario by any stretch of the imagination …
there’s a very real possibility of debt restructurings having to
take place for sovereign debt,” said Andrew Lim, analyst at
Matrix.

“Short term the market is positive on the fact that most of
the banks should pass it. But longer term investors will come to
the conclusion that the tests weren’t onerous enough.”

Greek 10-year government bonds traded at a discount of 38
percent at their low, according Tradeweb data. They have since
recovered to a 25 percent discount, implying the stress test
will apply a haircut of at least 13 percentage points on current
market prices.

Based on May lows, Tradeweb data show Portuguese and Irish
debt could each take a “haircut” of at least 12 percent from
their nominal value and the markdown for Spain could be over 3
percent. [ID:LDE66717X]

By 1345 GMT the STOXX Europe 600 bank sector index (.SX7P: )
was up 1.8 percent, adding to a near 8 percent rally over the
last two days, also helped by positive comments by analysts at
Credit Suisse and gains by U.S. peers.

Gainers were led by France’s BNP Paribas (BNPP.PA: ) and
Societe Generale (SOGN.PA: ), Deutsche Bank (DBKGn.DE: ) and Royal
Bank of Scotland (RBS.L: ), all up over 2.5 percent.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a BREAKINGVIEWS column, click on [ID:nLDE6670DZ] 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] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

TRANSPARENCY KEY TO SUCCESS

Most of Europe’s large banks are on the list to be tested,
as well as regional landesbanks and cajas, thought to be among
the weakest.

“The purpose of the stress test is to differentiate between
the listed and the unlisted banks. That’s deliberately the case
in Spain, but reluctantly the case in Germany,” said Simon
Maughan, analyst at MF Global.

“The elephant in the room in European banking is the awful
German domestic market. The Germans don’t feel the same
political and economic pressures as the Spanish to do anything
about it, but that’s what the stress tests will show,” he said.

European regulators appear to have heeded some lessons from
the 2009 U.S. stress tests, which were widely regarded as a
success in helping restore confidence. CEBS needs to go further
in making the process more transparent, analysts said.

U.S. investors took comfort that a line had been drawn under
potential exposures to worsening bad debts.

While the American tests reduced fears of more structured
credit losses, the key for Europe is to reduce worries about
sovereign debt exposures, analysts have said.

Regulators also need to make clear if banks will raise
capital privately or if there is a government backstop available
for any bank shown to be short of capital.

Under the U.S. test, 10 of the 19 banks tested were found to
need to raise $185 billion. After asset sales of restructuring
the capital need was about $75 billion. The banks were told to
raise capital or accept taxpayer help.

The U.S. test process helped a recovery in bank stocks. The
KBW bank index (.BKW: ) rose 30 percent from the start of February
— just before the tests were announced — to the end of May,
after the results came out.
(Additional reporting by Paul Day In Madrid; Editing by Sharon
Lindores and Simon Jessop)

UPDATE 3-Europe shores up support for bank stress tests