• Borut Pahor says Nova Ljubljanska Banka will need funds
• Analysts fear the Europe-wide tests are not be strict enough
Slovenia admitted today that its largest bank would fail the Europe-wide stress tests amid frenzied speculation about the results of the health checks on 91 financial institutions, due to be published tomorrow.
With the Committee of European Banking Supervisors due to publish a breakdown of the tests at 5pm tomorrow, speculation mounted that the announcement could be brought forward to try to calm investors' nerves.
Analysts at Credit Suisse said they believed the most likely outcome would be that "no or very few" banks would fail and that investors would need to decide whether this made the tests credible.
The EU is testing banks to see if they have enough capital to withstand another downturn in the economy and a sovereign debt crisis, though many analysts, including those at Credit Suisse, fear the test may not be severe enough.
The market is hoping that full details of the worst-case scenarios used by the EU will be published. Until then, the Credit Suisse analysts said: "We believe that the assumptions for the stress test may not be severe enough."
Spanish savings banks, cajas, and Germany's regional banks, Landesbanks, are regarded as some of the most vulnerable by the market, along with Greek banks seen as weakened because of the bailout of the country by the International Monetary Fund.
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, the 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.
While many countries have insisted that none of their banks will need to raise extra funding – Britain included – Slovenia's prime minister, Borut Pahor, said that Nova Ljubljanska Banka would need to do so. The bank is the only one in Slovenia being tested. "The state will guarantee the stability of the banks in case the international situation changes, which is not expected," Pahor said.
There are concerns that the banks are being asked to hold more capital at a time when they have also been asked by governments to increase lending to households and businesses.David Sayer, global head of banking at KPMG, said: "The results of the European banks' stress tests due to be released tomorrow need to help in striking a delicate balance."
guardian.co.uk
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