(Bloomberg) -- European Union stress tests of the region’s largest banks are “tough” and will boost market confidence, leading to a rebound in lenders’ shares, the Brussels-based European Banking Federation said.
“Our perception is that they are rather tough,” Guido Ravoet, secretary general of the EBF, said in a telephone interview today. Assumed losses on sovereign bonds, the so- called haircuts, range from 5 percent to 30 percent in the tests, depending on the country, he said, citing information passed on from banks. Ravoet said he didn’t know the haircuts on individual states’ bonds.

EU regulators are carrying out stress tests on 91 lenders aimed at reassuring investors that banks have enough capital to withstand economic and sovereign debt shocks. Assessments carried out in the U.S. last year found 10 lenders needed to raise $74.6 billion of capital.

The 54-member Bloomberg Europe Banks and Financial Services Index slumped 13 percent in the second quarter amid the region’s sovereign-debt crisis.

Publication of the test results will “boost confidence” in the markets, which will have a “beneficial impact on the share prices” of lenders, Ravoet said. A number of lenders will probably fail the tests and governments “must stand ready to assist these banks” as they may struggle to tap markets for additional capital, he said.
Spanish Savings Banks

“My guess is that investors will be very cautious to invest in these banks, that would be a normal attitude,” according to Ravoet.

Spanish savings banks and the state-owned Landesbanken in Germany will probably be among the lenders experiencing “most difficulties with coming out with a positive stress test,” Ravoet said. The Europe-wide stress tests, organized by the Committee of European Banking Supervisors, include seven German Landesbanken, including Stuttgart-based Landesbank Baden- Wuerttemberg and WestLB AG in Dusseldorf.

The EBF represents the interests of about 5,000 European banks. Its members are national banking groups such as the British Bankers’ Association and the Association of German Banks. UniCredit SpA Chief Executive Officer Alessandro Profumo is the EBF’s president, according to the federation’s website.