BRUSSELS (MNI) – European governments will say they are ready to
use backstop mechanisms to recapitalise their banks if stress tests show
a need for such action, a document prepared ahead of a meeting of
European finance ministers in Brussels next week shows.

The finer points of how this backstopping will work will be a major
topic for discussion when finance ministers gather in Brussels next
Monday and Tuesday.

The information in the document, obtained by Market News
International, outlines how the results of the stress tests of Europe’s
banks will be released later this month.

To try and reassure markets that European Union banks are safe,
Europe’s policymakers have said they will release the results of stress
tests of 91 banks on July 23. The exercise will cover around 65% of all
EU banking assets, according to the Committee of European Banking
Supervisors (CEBS), which is carrying out the tests.

According to an EU internal briefing document, the announcement of
the results will come in three stages, all of which will happen on the
same day:

Initially, CEBS will announce the aggregate results of the test, at
the EU-wide level.

It will then fall to each of the 27 national regulators to announce
the results for the individual banks that come under their jurisdiction.

Banks on the 91-strong list include UK-based HSBC, Lloyds, Barclays
and Royal Bank of Scotland, France’s BNP Paribas and Germany’s Deutsche
Bank.

Finally, and the paper stresses, “only if there is a need,”
individual member state governments will make a statement saying they
“stand ready to use back stop mechanisms for recapitalisation” if banks
have been deemed in need of such support.

There is no mention of whether that backstop mechanism could
include the recently-created E440 billion European Financial Stability
Facility (EFSF), although some policymakers are said to favour using it,
if the need arises. The EFSF was set up earlier this year in response to
the sovereign bond crisis.

Some critics of the process say the EU’s stress tests are not
sufficiently rigorous or overlook key points.

They point out that UK-based lender Northern Rock was proven to be
able to withstand a 40% decline in UK house prices, but wasn’t tested
for a collapse of inter-bank lending, which proved the eventual cause of
its demise.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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