WRAPUP 2-European bank tests put focus on capital hikes

* Credit Suisse sees up to 90 bln euros in new capital needs

* Spain says tests to show banks solvent

* Euro zone ministers to meet, focus on capital raising

* European bank group warns of deeper haircuts than thought

* Bank shares up 10 pct since Monday
(Adds Reuters Insider, EBF interviews)

By Ben Berkowitz

AMSTERDAM, July 9 (BestGrowthStock) – European finance ministers
will shift their focus next week onto a possible need for banks
to raise more capital and on who will cover any shortfalls
exposed by stress tests — a sum which Credit Suisse estimated
could reach 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 problems, an EU
source said. [ID:nLDE6670V9]

Underscoring the sensitivity of the issue, European Central
Bank President Jean-Claude Trichet on Friday reiterated the
crisis was not over and 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 and which measure the impact of a
possible further economic downturn on banks’ balance sheets,
Credit Suisse suggested in a research note.

Spanish savings banks, which so far have tapped into 11.2
billion euros of the country’s restructuring fund, would also
need another 12 billion euros in a scenario where the economy
weakened sharply and discounts were required on sovereign debt,
the note said.

But Spain’s economy minister Elena Salgado said on Friday
that the test would show that banks in the country, where fears
have receded over the viability of its economy, were solvent.

Credit Suisse suggested, however, that the real issue is not
the banks’ performance, 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.

John Lipsky, the first deputy managing director of the
International Monetary Fund, said it appeared Europe was
following the necessary steps to make the process work.

“The important thing is it looks like there is a clear
committment to the steps that would be necessary to provide a
successful operation,” Lipsky told Reuters Insider television on
the sidelines of a conference in Frankfurt.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ John Lipsky on Reuters Insider http://r.reuters.com/gag76m 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]

But the European Banking Federation warned on Friday the
haircuts on sovereign debt in the testing could be deeper than
has been suggested.

“If we understand well, they apply quite important haircuts
on sovereign bonds, 17 percent on average. That means going from
5 percent to 30 percent, depending on the country,” the EBF’s
secretary-general, Guido Ravoet, told Reuters. [ID:nLDE6680TW]

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 just
over 10 percent, while the FTSEurofirst 300 index (.FTEU3: ) is up
about 5 percent in the same period. On Friday the banking sector
index was 0.2 percent firmer.
($1=.7885 euros)
(Additional reporting by Marcin Grajewski in Brussels, Fiona
Ortiz in Madrid and Nick Edwards in Frankfurt; Editing by Greg
Mahlich)

WRAPUP 2-European bank tests put focus on capital hikes