Spain, Germany prod EU on bank stress test disclosure

Spain's central bank will publish stress tests on its lenders and Germany is coordinating disclosure at EU level, moving Europe's banking sector closer to putting its financial health on public display.

After media leaks that Madrid was keen on disclosure of stress tests on banks to dispel rumours it is about to seek Greek-style aid, the Bank of Spain said on Wednesday it would publish them in the near future.

A day ahead of a European Union summit likely to focus on regulatory matters, Germany's finance ministry quickly responded that it was coordinating the issue with EU partners. Bankers said the two countries might jointly provide the impetus for action on a European scale.

"If Germany supports Spain in its push, the debate in the EU gets a special dynamic which makes publication more likely" said one European banking source.

A source from French President Nicolas Sarkozy's office said France would have no objection to publishing stress tests.

"France would have no difficulty, if there was a decision in favour of stress-testing, to join" the source said. "It does not have any difficulty in publishing the results of these stress tests, we have no particular concern in this matter."

Spain's banks have largely weathered the financial crisis but the capital of the country's 45 savings banks has been eroded by exposure to property and construction. Listed and savings banks have about 400 billion euros in property-related debts on their books.

"The stress tests are to prove that all banks have sufficient capital to cope with economic growth scenarios, which at present seem most reasonable, but also future complicated growth scenarios" Spanish Central Bank Governor Miguel Angel Fernandez Ordonez said in a speech.

Banks in Spain and the rest of the European Union have been undergoing tests, carried out by the bloc's 27 national banking regulators, on their ability to withstand liquidity problems.

The results are to be passed onto EU finance ministers, and senior European Central Bank officials said earlier this month the tests were near completion and it believed that they should be published to help restore market confidence.

However, details of a previous test were made public only in broad terms with no reference to individual banks. The lenders were tested for how they would respond to a sharp contraction in the EU economy and the results, released in limited form last October, suggested none of the top 22 EU banks would be at risk.

Debate has continued since then, with the likes of U.S. Treasury Secretary Timothy Geithner and the Financial Stability Board's Mario Draghi saying disclosure like the United States permitted last year after tests on its banks "clears the air" and restores banks to a position where they can raise capital.

POLITICAL RESISTANCE

Draghi, who is also a member of the ECB Governing Council, said earlier this month that Europe should take a leaf out of Washington's book and publish stress test results.

A senior New York Federal Reserve Bank official said the release of U.S. tests last year had a "calming force" on markets - though New York Fed research head Simon Potter cautioned that the tests' credibility was dependent on the Treasury's Capital Assistance Program being available to provide capital.

After a German government official said disclosure was a possibility as were "other options" bankers in Germany said the issue had become "very topical" in Berlin, where the feeling was that "systemic risk is off the table."

However, German officials have acknowledged there could be stiff political resistance to disclosure, especially if it made banks belonging to the German states look more vulnerable.

One of the main sticking points in the disclosure debate is whether results should be made public for individual banks or on a broader basis, and whether EU member states should take such initiatives unilaterally - like Spain - or in unison.

"I have a critical view of outing individual banks" Austrian Finance Minister Josef Proell told reporters. "I can't see the advantage of naming individual banks."

A banking analyst at one leading Spanish brokerage doubted the tests would dispel insolvency talk, saying: "Honestly I think that if there is good news in terms of solvency then there will be very little positive effect. Spain is in the eye of the hurricane whatever."

One banking source said such decisions should be taken on an EU-wide level, mindful of the criticism of Germany's recent solo initiative on banning speculative trading in leading banking stocks and other assets, taken without consulting its EU peers.