WRAPUP 3-EU agrees key criteria for testing health of banks

* EU agrees on test details, focus on core tier 1 capital

* One source cites 6 pct pass level for core capital

* IMF, Juncker optimistic on stress tests

* Irish banks already passed tougher tests – c.bank

(Updates with agreed stress tests’ details)

By Julien Toyer and Yves Clarisse

BRUSSELS/PARIS, July 16 (BestGrowthStock) – European Union officials
have agreed the key criteria of stress tests for the bloc’s
banks including the minimum level of capital, EU sources said on
Friday, as senior policymakers voiced optimism on the results.

Banks will need to have a core Tier 1 capital ratio of at
least 6 percent under the health check, one of the sources said.
The test will assess if 91 European banks are strong enough to
withstand a second economic downturn.
Under the agreement, each of the banks will publish its
result at 1600 GMT on July 23, and the London-based Committee of
European Banking Supervisors (CEBS) will issue a statement
summing up the outcome a minute later, several sources said,
asking not to be named.

That would provide time over the weekend to digest the
results and also time to deal with any trouble spots, industry
sources said.

Banks have rebuilt capital in the last 18 months and major
banks have lifted their core Tier 1 ratio — a measure of banks’
financial strength — above 6 percent, which many see as the
minimum accepted by market investors.

The main criterion of the test will be to have a certain
minimum capital level even in adverse economic conditions,
sources said. Exposure to sovereign debt risk will be the second
indicator in order of importance.

The final details of the tests will be discussed on July 22
at a teleconference of senior finance ministry officials from EU
countries and representatives of the European Commission and the
European Central Bank.

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International Monetary Fund chief Dominique Strauss-Kahn
said the tests should not reveal any major problems among the
big names, although it was possible that some smaller banks
would have to be recapitalised.

“I get the feeling that what will come out will be rather
reassuring, and that we’ll see that all the big European banks
are sufficiently solid to resist any earthquake,” he told a
French television station.

Jean-Claude Juncker, chairman of euro zone finance ministers
group, offered similar reassurance, telling Austrian newspaper
Kurier in an interview: “I am not expecting any big

However, if all major banks pass then it could raise
questions on whether the tests are severe enough.

“The problem is it seems all the banks are going to pass and
I don’t think that’s credible,” said Arturo de Frias, analyst at
Evolution Securities in London.

“If Europe goes for the easy solution and says only a couple
of cajas in Spain or landesbanks in German fail and everybody
else is fine … then that’s not really a stress test.”

Europe is testing banks across 20 countries on how they
would cope with another economic downturn and losses on Greek
and some other government bonds.

The aim is to restore investor confidence by pinpointing any
weak spots and forcing vulnerable banks to raise cash.

“I think it’s important for Europe to get some confidence in
the European banks,” Citigroup (C.N: ) Chief Financial Officer
John Gerspach said on Friday after the U.S. bank’s results.

“It’s of somewhat importance to us, obviously for stability
in the system. It would be nice to see the markets calm down. So
hopefully the results will be something that everybody can put a
good deal of faith in.”

The tests are expected to show Spain’s cajas and German
landesbanks, the regional lenders, need capital. Analysts have
said each of those sectors could be shown to be at least $30
billion short of capital. Lenders in Greece and elsewhere may
need to raise modest amounts, analyst estimate.

Irish Central Bank Governor Patrick Honohan said his
country’s two biggest banks had already passed domestic stress
tests more severe than tests being organised by CEBS, but the
process was good to remove “exaggerated concerns about some
particular risks.” [ID:nLDE66F0LP]

EU sources would not discuss whether there was agreement on
the size of the “haircut” for government bond holdings and how
long any failing bank will have to raise funds.
(Reporting by Julien Toyer in Brussels, Yves Clarisse in Paris,
Sylvia Westall in Vienna and Andras Gergely in Dublin; writing
by Steve Slater and Marcin Grajewski, editing by Mike Peacock
and David Cowell)

WRAPUP 3-EU agrees key criteria for testing health of banks