Stress tests: what the results mean for bank shares

Shares in many banks across Europe advanced on Monday after the European Union published the results of its stress tests late on Friday.

But the publication has done little to end the debate about whether the tests were rigorous enough and whether they really tell us what we need to know about the strength of the European banking sector.

Many winners but too few losers

Of the 91 banks tested just seven failed. Most of the banks that failed were not listed on the stock market. Many have already been promised state help and most are generally deemed to be too small to matter.

Some analysts have run their own numbers and have suggested that if more appropriate and stringent tests were applied the number of failures would be closer to 25.

Others say the €3.5 billion (£2.9 billion) sum the testers say banks need to raise is one-tenth of the lowest estimate from analysts, adding to worries that a key opportunity to strengthen the banks has been missed.

One of the benefits of the test is we now have a greater idea of which banks have the most exposure to government debt in the indebted southern European economies.

As expected, Spain's Santander – which in the UK owns Alliance & Leicester, Abbey and Bradford & Bingley and is looking to buy some RBS branches – did well as did France's BNP Paribas. The relative strength of the Nordic banks was never in doubt.

Ongoing concern about some European banks

Joe Dickerson, analyst at Execution Noble, believes the results for the Spanish banks were particularly worrying.

Running his own tests which assume more risk from property developers, he believes the Spanish banks need to raise €23 billion – €20 billion more than the Bank of Spain said is needed.

Many commentators agree the very low European economic growth assumed by the testers was sufficiently pessimistic but think the pass rate for the ratio of assets to liabilities should have been set higher.

There is also concern that six German banks did not publish a detailed break-down of their government debt holdings, fuelling suspicion they have something to hide.

The UK banks were never at risk

Four UK banks were tested; Barclays, HSBC, Lloyds and RBS. All passed with flying colours. That was never in doubt as the quartet had all already passed much more stringent tests in the UK.