World Finance

World Finance

February 24, 2014 13:28 ET

Moodys: EU bank stress tests may highlight public fund failures

LONDON, ENGLAND--(Marketwired - Feb. 24, 2014) - A leading economist at Moody's has suggested that the ECB's stress tests could be catastrophic in nature unless European officials agree to recapitalisation plans should banks fail the examinations.

"A major challenge at the minute is if they identify a bank as needing to be recapitalised and that bank is unable to do it from private sources there's a big question mark over how the public funds will step in," said Moody's economist Zach Witten in an interview with World Finance.

"European officials haven't agreed at the moment for a public back stop and it would be a catastrophe if banks had these capital gaps and they couldn't be filled so basically European officials need to agree some mechanism before the stress test results are released in October."

With confidence in Europe's financial sector struggling to recover, stress tests at this time may highlight a number of banks' risk-favoured liquidity preference, which would have a high chance of failing the ECB's tests and further deter confidence.

Witten adds the rigorous testing will bring more transparency to the sector.

"A good point coming out the ECB's comprehensive assessment is that for the first time the banks will be quantifying what sovereign debt the banks are holding onto their books," said Witten. "So hopefully that will increase confidence into bank lending. The European Central bank is also going to quantify liquid assets and hard to value assets. So that's another positive for the economy."

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