10.45am: Hello, and welcome to our live coverage of the publication of the European banking stress tests.
It's judgement day for Europe's banks. In the next few hours the European Union will publish full details of the health checks that have been conducted on major and minor financial institutions across the region. These test have the power to reassure investors that the banking sector is in robust shape, or spark a new wave of panic.
The results are due at 5pm today, although the whisper in the City is that the EU might bring them forward in an effort to calm the markets. We'll be bringing you the latest predictions, analysis and rumours in the run-up to the announcement, and full details of the results as soon as we have them.
10.49am: A total of 91 banks are taking part in the exercise. These stress tests will assess whether banks are holding enough capital to cover their losses if the European economy took another downward turn, sparking a crisis in the sovereign debt market (which governments use to fund their borrowing). The EU has run some worst-case scenarios, to see how each bank shapes up.
So what are we expecting? Slovenia has already admitted that its biggest bank will fail the test, while smaller operators in Portugal and Spain might also miss the cut. The UK banks are all expected to get the all-clear - and there will be a major panic if this prediction turns sour.
10.56am: As my colleague Jill Treanor points out, the banking sector has already taken steps to rebuilt defences following the financial crisis which began nearly two years ago.
While there has been concern in the markets that if enough banks do not fail the stress tests they will not prove to be credible, Credit Suisse analysts also point out that many banks in the 27 EU countries have already raised funds – including in Greece, Spain and Ireland, whose economy has been crippled by the property downturn.
The market is comparing the EU tests to the one conducted by the US in May 2009, when 10 large banks needed to raise $65bn (£43bn) of fresh funds. The Credit Suisse experts point out the European banking sector has already been bolstered by €200bn (£170bn) since then.
11.05am: UK bank shares are broadly flat ahead of the results, but we're seeing some turbulence in other European markets. Over in Athens, ATEbank (the Greek state-controlled lender) has fallen by nearly 5% this morning as traders predict that it will be corralled in the losers pen when the day is up.
As Cyclos Securities analyst Constantinos Vergos put it: "The market expects that ATEbank will need to recapitalise after this afternoon's stress test results."
There is a rumour doing the rounds that the other five Greek banks being assessed have all passed. National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank and Hellenic Postbank are all known to have higher capital ratios than ATEbank.
As the Wall Street Journal pointed out, ATEBank is also a likely casualty as it has been used to inject funds into Greece's farming sector for many years - and many of those loans have been defaulted on.
11.21am: We promised you some interesting City research - and here we are, courtesy of Goldman Sachs which just published a research note in the stress tests.
Its Banks team and European Portfolio Strategy team canvassed 386 experts, and has concluded that 10 banks will fail the tests today. That is a bigger strike rate than we'd been expecting. Goldman also reckons that the tests will show a shortfall of €38bn.
Digging into the survey, there are some outlying forecasts - with a few participants saying that at least 20 banks could fail. At the other end of the graph, some people think you'll be able to count the failures on the fingers of one hand.
As Goldman puts it: "there appears to be very little consensus about the outcome, how much will be raised and what the impact will be."
Other key points from Goldman research note:
• Banks domiciled in Spain, Germany and Greece are expected to raise the most fresh capital.
• The source of capital is expected to be split between the public (51%) and private (49%) sector.
• Opinions remain split on the performance of the sector in the 3 months following the stress test, with 38% expecting outperformance, 26% underperformance and 36% in-line performance.
11.34am: Gertrude Tumpel-Gugerell, a member of the European Central Bank's executive board, is speaking about the stress tests in London today. She's been taking a bullish tone, declaring that they will "send a clear message to the market about the resilience of the financial system."
Tumpel-Gugerell also told the European Economics and Financial Centre that:
"A path out of the worst financial crisis of our generation seems to be in sight, and there are signs that a recovery is under way...Yet, the return to normality could be gradual. It requires
support."
11.38am: Mark Deans, dealing manager at Moneycorp, believes we could see some fireworks when the results come out.
It is important to remember that the markets are still acting cautiously in the build-up to the Bank Stress Test results and that the currency markets are likely to fluctuate after 5pm today.
11.55am: Apparently we shouldn't even be worrying about the stress tests at all, because they won't give an accurate assessment of the situation.
That's the verdict of Ralph Silva, director of Silva Research Network. He has predicted that the banks will dodge the issue by simply claiming that they will recapitalise themselves from another bank based in another country in the event of a crisis.
Silva also questioned the timing of the tests: "You don't ask someone to run a marathon a week after they broke their leg. We are stress testing the banks in a position where they are recovering," he said.
"By doing these stress tests what we are in fact doing is highlighting the problems that are going to stop them from lending instead of encouraging them to lend," Silva added.
You can watch Silva's full interview with CNBC here.
11.59am: Other criticisms of the stress tests are that we don't know the full methodology that is being used. There is also concern that the tests are being applied by various national regulators, who may vary the tests to fit with particular circumstances in their country.
It's also worth noting that if everyone passes, the tests won't have much validity. Some banks has to fail to prove the tests are rigorous, basically, but not too many as to suggest the whole sector is shot.
12.09pm: Elsewhere, there's a thorough Q&A on the stress tests here.
BBC business editor Robert Peston, meanwhile, warns that the stress tests already look like a "bungled exercise that may sow alarm rather than calm" in a blogpost here.
Although they are thought to assume a theoretical 25% drop in the value of relevant government bonds (eg, the price at which they are traded between investors), they don't actually include the possibility of a European country actually defaulting on its debts.
12.39pm: With the markets trying to second guess the results of the stress tests, any news is being grasped and all meaning squeezed out of it. But that means quite a few wild rumours are doing the rounds as speculators hope to generate a bit of volatility in the markets.
The European Commission, for instance, is trying to calm fears that its decision to allow Spain and Portugal to extend state support to their banks until the end of the year is NOT related to the stress tests.
The commission's decision to make the announcement today - just hours ahead of the results of the stress tests - had raised alarm in the markets that Europe's regulators were rushing to put in safety measures ahead of news that banks in the two countries had failed the tests.
But a Commission spokesman told Reuters: "The timing of this is completely unrelated to the publication of stress tests later today."
12.42pm: Shares in London, meanwhile, are drifting lower as traders await the results of the tests, according to our markets reporter Nick Fletcher in his latest Market Forces blogpost.
1.09pm: One of the reasons that the stress tests are being carried out in the first place, of course, is the potential for another banking crisis. Many market watchers believe the catalyst for another banking crisis will be problems in the sovereign debt markets as many of Europe's major lenders are exposed to government debt.
The debt markets have, of course, already been rocked by the turmoil in Greece – which had its rating downgraded to junk status - and the downgrading of credit ratings for Spain and for Portugal within recent weeks.
Just last week, credit ratings agency Moody's downgarded its rating on Ireland.
Now Moody's has its eyes on Hungary after it ended talks with the IMF and EU on a €20bn (£17bn) aid deal. Hungarian premier Victor Orban has said he will no longer negotiate with the IMF as he intends to restore the country's "lost economic self-rule".
The credit ratings agency, however, believes Budapest should commit to the budget deficit targets and accept international help. It has placed Hungary's Baa1 local and foreign currency government bond ratings on review for a possible downgrade.
"Moody's decision to initiate this review was prompted by the increased uncertainty regarding Hungary's fiscal outlook and economic prospects," the agency said.
"This uncertainty is the result of the recent breakdown of Hungary's talks with the IMF and EU."
Standard & Poor's said later that it has revised its outlook on Hungary to negative from stable. It has a BBB-/A-3 rating on the country, which is already lower than Moody's.
1.45pm: Details of exactly how the stress tests have been structured are emerging, with one of the European Central Bank's own board members admitting that the tests expose banks to "a hypothetical situation that is very improbable".
Jose Manuel Gonzalez-Paramo said the tests assume government debt prices fall back to the levels seen at the start of May - at the height of the euro zone crisis - and remain there.
The tests assume "that spreads for public debt maintain at prices at the same levels at the beginning of May in the worst moment of the sovereign risk crisis," he said in a speech at a conference organised by Eurobask, according to a Reuters report.
"Also, that the debt crisis is transmitted to the loan books of the banking system," he added.
2.06pm: The analytical wizards at financial research firm Markit have been looking at the spreads among credit default swaps (CDS) in the run-up to the stress tests and reckon that "bank spreads have been tightening in recent weeks amid tentative optimism that the tests will ease concerns about balance sheet weakness, at least for the near time being".
In a new report, Markit is not trying to second guess which banks are likely to fail the tests, merely look, country by country, at the performance of some selected banks in the CDS market, which it reckons is the most reliable barometer of credit risk.
A total of 61 banks are in the report, compared with 91 undertaking the test, because some of the smaller banks don't trade, or rarely trade, in the CDS market. Markit concludes:
Looking at the tables, it is no surprise to see that the majority of the riskiest banks are in the eurozone's periphery – Greece, Ireland, Portugal and Spain. These banks have direct exposure to sovereign risk through their holdings of government bonds. They are also exposed to slowing domestic economies brought about by fiscal austerity.
2.28pm: The euro has fallen to a fresh low for the trading session - dipping under $1.28 against the dollar - as traders await the results of the stress tests. The euro has traded as low as $1.2794 and is currently around $1.2799, down 0.7%.
2.40pm: More details of the stress tests are leaking out. Apparently the 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity, according to a draft European Central Bank document seen by Bloomberg.
"The haircuts are applied to the trading book portfolios only, as no default assumption was considered," according to a confidential document dated July 22 and titled "EU Stress Test Exercise: Key Messages on Methodological Issues."
The tests will assume a loss of 23.1% on Greek debt, 14% of Portuguese bonds, 12.3% on Spanish debt, and 4.7% on German state debt while UK government bonds will be subject to a 10% haircut, and France 5.9%.
2.48pm: The CEBS is releasing the methodology behind the stress tests ahead of the release of the actual results - which will still be at 5PM London time (1600 GMT)
3.03pm: The stress tests carried out on 91 European banks assumed a double dip recession, a dramatic plunge in stockmarkets and a four notch drop in sovereign debt credit ratings, according to the Committee of European Banking Supervisors (CEBS).
The methodology behind the tests has been released ahead of the actual results of the tests at 5PM London time (1600GMT) in an effort to show how tough the tests really were. Banks failed the test if they were unable to maintain a tier 1 capital ratio of 6% under each scenario.
The scenarios used to test Europe's banks were tougher, according to EU regulators and the CEBS, than the scenarios used in last year's stress tests in the US. The European scenarios have a likelihood of happening once every two decades while the US ones could occur once every seven years.
The European tests assumed that the European economy would shrink by 3% over 2010 and 2011, with stockmarkets, plunging 20% in both years – a compound loss of 36%.
Credit ratings on securitised products, meanwhile, dropped four notches, although – as reported earlier – losses on sovereign debt holdings applied only to bonds the banks traded, not those that they held to maturity.
3.16pm: More analysis of the market reaction from Jill Treanor:
The euro is still down around fell half a cent against the dollar at $1.2820 after news of the methodology behind the stress tests broke. It seems the real worry is about the scenarios employed for losses on sovereign debt.
Firstly, there seems to be some anxiety about whether the 23% "haircut" applied to Greek debt is really large enough and secondly, the fact the fall in price was only applied to holdings in trading books rather than banking books matters to the market. This is because bonds that banks hold to maturity in their banking books will not the subjected to the test.
3.23pm: We still won't know the result of the stress tests for another hour and a half but any analyst wanting to do their own stress tests on a bank's sovereign debt holding should be able to do so shortly. CEBS is demanding that each bank spell out its holdings of government debt for all EU countries. This separates the trading and banking book holdings, and reports both gross and net positions, taking account of hedging contracts.
So any analyst who feels unsatisfied by the haircuts only being applied to trading positions will be able to do their own maths.
3.58pm: Even before the tests are published, banks in Greece, Spain and Slovenia are raising funds. Already today the National Bank of Greece has raised €450m, Banca Civica in Spain is selling convertible bonds to private equity house JC Flowers and Solvenia's Nova Ljubljanska Banka is planning a €400m cash call.
4.53pm: Just a few minutes to go until we finally know the results. The Committee of European Central Banking Supervisors is getting ready - the front of the website has now been updated..... the clock ticks...
5.00pm: Right on time, the first results are coming through on the Reuters terminal....
The Bank of Portugal has declared that all the Portugese banks have passed the tests
Nothing on the actual CEBS web site yet, though....
5.02pm: We've got the first failures too, and Germany's Hypo Real Estate has missed the cut after regulators calculated that its tier 1 capital ratio would fell to just 4.7% if there was a shock to the sovereign debt market.
That was largely expected - the shock will be if another German bank has also failed.
5.04pm: France's banking sector has also got the all-clear - with BNP Paribas, Socgen, BPCE and Credit Agricole all passing the stress tests.
5.09pm: Over in Spain, five banks have failed the tests.
They are Espiga, Diada, Banca Civica. Cajasur and Unnim. Will bring you full details of why very soon.
Meanwhile the full report is now up on the CEBS site - with an "executive summary" that covers 55 pages. There'll be some long shifts being pulled in the City tonight.....
5.19pm: We reckon that seven banks have failed the stress tests. The final one is Greece's ATEbank, which was being tipped some hours ago.
The testing found that ATEbank would have a Tier 1 capital ratio of 4.36% under the most adverse scenario, leaving it short of €242.6m.
There's clearly massive interest in these tests, as the CEBS website is wobbling and appeared to crash just then. Seems to be working OK now - don't all click at once.
5.24pm: The total capital shortfall is €3.5bn. The EU and CEBS just said in a joint statement that the seven banks should seek extra funding from the private sector, or turn to their national governments is necessary.
The instant reaction from the City may not please Europe's politicians, though, with several traders and analysts questioning whether the tests were rigorous - especially as no major banks have been failed. As Stephen Pope of Cantor Fitzgerald put it:
I've seen nothing stressful about this test. It's like sending the banks away for a weekend of R&R.
Ian Stannard, senior currency strategist at BNP Paribas, also suggested that the tests were perhaps not as tough as they could have been.
The euro has been fluctuating since the tests came out, and is now down again at $1.2831.
5.40pm: Right, finally got the UK results. As you've already worked out, the big four banks all showed that they could ride out the scenarios tested by the Financial Services Authority.
The results suggest (on the face of it), that Britain's banks are in good shape. Here are their Tier 1 capital ratios under the most adverse scenario:
Barclays: 13.7%
HSBC: 10.2%
Lloyds Banking Group: 9.2%
Royal Bank of Scotland: 11.2%
5.47pm: The FSA has also published details of its testing methodology, which gives an insight into how the process was carried out.
As you can see, the "sovereign stress" part of the exercise simulated a run on government debt, but only considered the impact on a bank's trading operations. So (as mentioned earlier today), the tests explicitely do not consider a European country defaulting on its debts.
The objective of the CEBS exercise is to undertake an assessment of the strength of EU banks in a consistent manner across institutions and countries. It focused on three different scenarios; a benchmark stress, a more adverse macro-economic stress and a country-wide stress.
The benchmark stress identifies movements in parameters such as GDP, unemployment and interest rates and charts a mild deviation away from the pathway which the economy is currently on: it then makes conservative assumptions about the loan losses which will result in this macro-economic scenario. This helps to set a benchmark (mildly stressed scenario) against which the more adverse stress is then applied. The adverse stress assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission's forecasts over the two-year time horizon. The method of translating this scenario to loss rates is also conservative.
A further 'sovereign stress' was then applied. This tested the resilience of banks to an increase in the yields of government bonds issued by EU member states. It simulates, (i) the associated medium term uptick in household and corporate sector loan losses in the banking book, and (ii) immediate mark to market losses arising from trading book holdings of government bonds of each country. The actual exposures of each bank to central and local government across the EU have been published by each bank.
Results identify the simulated Tier 1 ratios of European banks as well as specific simulations for profit and loss measures. The CEBS results are focused on Tier 1 ratios for comparability across the EU.
As expected the outcomes of the stresses demonstrate the preparedness and resilience of the UK banks under unlikely adverse economic scenarios. The FSA has published the high level results for the UK banks. This resilience is a result of the considerable work that has been undertaken to strengthen UK banks in recent years. The CEBS stress test is different but complementary to the FSA's stress testing regime.
5.57pm: Just got an excellent research note from Gary Jenkins of Evolution Securities - I'll fillet the key points:
The long awaited bank stress tests do not seem to have been that stressful after all. This is not surprising. The last thing the authorities would have wanted to do was to set a series of assumptions that would have led to a broad failure across the Euro area, as this could only do more damage to the already frail markets. The most controversial area surrounds the treatment of the banks Sovereign debt holdings. The haircuts on these bonds only applied to the banks trading books, whereas the majority of these bonds are held on the banking books. In some ways this is consistent with the EU's comments that no EU sovereign will be allowed to fail, although of course if there is a Sovereign failure at a later date where the debt is held will make no difference to the actual loss that would be taken.
Jenkins also argues that it would be a mistake to think that the seven banks which failed today would be allowed to go under "in the real world":
They will no doubt either raise capital from the private sector or more likely from their respective governments, as no-one is prepared to undertake another Lehmans like experiment.
In conclusion, Jenkins reckons the stress tests will soon be forgotten:
My view is that whilst the stress tests do not take into account the worst case scenario of multiple sovereign failures, we know what the impact of such a disastrous backdrop would be anyway; that is a complete collapse of the western worlds financial system! The EU governments will not allow banks to actually fail in the market, thus it is the sovereign bond market that is key in the short term, because there is not anyone who can bail out the governments (aside from printing money).
6.05pm: And the prize for Europe's strongest financial institution goes to... OTP Bank Nyrt! It boasted a Tier 1 ratio of 16% after the worst case scenario tested.
Who they, I hear you mutter. It's Hungary's largest bank, of course. The presence of a Hungarian lender at the top of the list might be slightly embarrassing for the EU, though, given Hungary's particular problems - talks with the International Monetary Fund and the EU broke down last week, which means a €20bn loan programme has been suspended
Only this morning, ratings agency Moody's warned it might downgrade Hungary, pointing to its weak economy as well as its wrangles with the IMF.
6.44pm: There's a good comment piece from Dow Jones over on the Wall Street Journal, arguing that the seven failed banks were a pretty ropey bunch.
As they point out, ATEBank of Greece has the lowest capital ratios of any of the Greek banks being tested. It's 77% owned by the Greek state and has long been saddled with problem loans and businesses relating to its role as government lender to the farm sector.
Hypo Real Estate of Germany has been nationalized since 2009 after requiring more than €102 billion in loans and state guarantees after it and its Irish unit Depfa PLC were heavily hit by the financial crisis. It is already being split into a Good bank and Bad bank - something the stress tests didn't take into account.
The five Spanish savings banks, known as cajas, had all suffered from the collapse of Spain's property bubble. As promised almost two hours ago, here's the breakdown of how their tier 1 ratios came in (against the target of 6% or higher):
• Unnim: 4.5%
• Diada: 3.9%
• Espiga: 5.6%
• Banca Civica: 4.7%
• Cajasur: 4.3%
City analysts are still digging through the data, so we may have more developments tonight. But if not, thanks for reading.
You have characters left
Please read our community standards.
Closing this window without pressing "Post your comment" will result in your words being lost.
Are you sure?
Thank you for your comment. This has been submitted for moderation.
Your comment has been successfully posted.
Sorry, something has gone wrong and this action cannot be completed. Please try again later.