Bank stress-tests: Can we trust the tyre-kicking?

Europe's banks have undergone another round of health tests, with worrying results for Italy.

Stress testing banks to see if they might require a taxpayer-funded bail-out is becoming "one of Europe's newer traditions", says The Economist. The latest exercise involved 130 of the region's largest institutions; the results, released on Sunday, found that 25 banks had a capital shortfall as of the end of 2013.

Half of those had since raised enough money to plug the gap, leaving 13 firms needing a further €9.5bn. Most of these require small amounts. Only three banks one each in Italy, Portugal and Greece need to raise more than €1bn.

Of course, given that the trend in past tests has been for banks to be declared in good health only to "topple over soon after", markets may treat results with caution. "But this time is different, the organisers say."

The tests involved a detailed examination of the quality of the loans held by most of the banks, conducted by the European Central Bank, which is "now regarded as the most credible institution in Europe". This may encourage investors to believe that all is finally well in the banking sector.

Still, there is one clear loser from the results, says Capital Economics:Italy, where four of the banks that face shortfalls are based. All may struggle to raise capital privately, especially Monte dei Paschi di Siena, which has already tapped long-suffering shareholders for €5bn this year.

"This raises a worrying comparison with Spain's poor performance in the 2011 stress tests, which ultimately led to an EU-funded bank bail-out the following year."

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