Bloomberg News

European Stress Tests May Spur Need for More Capital, S&P Says

July 19, 2011

July 19 (Bloomberg) -- European banks may seek to raise additional capital after last week’s stress tests revealed their riskiest investments and showed a need to curb their dependence on governments, ratings company Standard & Poor’s said.

“The stress test process is likely to add further impetus to banks’ capital raising efforts in the lead-up to the implementation of Basel III,” Richard Barnes, a London-based credit analyst said in a report today. “Sovereign support remains an important rating factor for many European banks.”

The stress tests on 90 European banks published on July 15 showed eight lenders had a combined 2.5 billion-euro ($3.5 billion) capital shortfall. Shares of European lenders across the region slumped yesterday as the tests failed to ease concern they remain vulnerable to a potential sovereign default.

The tests by the European Banking Authority showed that 16 percent of the 1 trillion euros of core tier 1 capital held by lenders came from government, S&P said. The data on lenders’ holdings of sovereign debt showed how governments depend on domestic lenders to fund their deficits, Barnes said.

“The unwinding of this interdependency is likely to be difficult and take an extended period of time,” he wrote.

Standard & Poor’s doesn’t plan to revise any it its ratings based on the release of the stress tests, it said today.

--Editors: Edward Evans, Francis Harris.

To contact the reporter on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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