July 6 (Bloomberg) -- European stress tests may show that 26 rated banks of the 91 lenders being examined by the European Banking Authority could need financial support, Moody’s Investors Service said today.
“Moody’s believes that 26 rated banks have a heightened risk of needing extraordinary external support, as indicated by their non-investment-grade standalone credit strength,” the ratings company said in a statement. “Moody’s expects the banks that fail the EBA stress test will be among those lower-rated banks, or among the non-rated banks included in the EBA stress test.”
Ninety-one banks will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, the EBA has said. This year’s exams, which may be published as soon as next week, will include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets as well as possible trading losses on sovereign debt.
“The stress test of European banks is likely to have limited rating implications and should have a variety of positive effects for banks,” such as prompting several banks to strengthen their capital, Moody’s said.
Other benefits include the planned disclosure of banks’ sovereign exposures -- even though they fail to examine a national default -- and the insight the tests give into regulators’ assessment of banks’ capital positions, Moody’s said.
--With assistance from Colin Keatinge in London. Editors: Peter Chapman, Christopher Scinta
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