BRUSSELS — Stress tests on European banks have been expanded to include more banks and additional criteria, including a look at each bank's risks of exposure to the sovereign debt of Europe's more troubled economies, people familiar with the matter said Tuesday.
The tests, being conducted by the Committee of European Banking Supervisors in cooperation with national regulators, will now include 70 to 120 banks, up from the original 25 banking giants. That will mean that second-tier banks, including German state-controlled banks--the Landesbanken--and Spanish cajas will be included in the tests.
The expanded testing is already under way and results will be published by the end of July, officials from the European Union decided at their meeting June 17.
Some information from the initial phases of the testing on the top 25 banks has already reached the markets.
On June 17, a spokesman for Spanish Prime Minister Jose Luis Rodriguez Zapatero said that banking giant Banco Santander SA had "one of the best" results from the stress tests conducted by the CEBS.
Meanwhile, several people familiar with the matter said Tuesday that three German banks included in the initial 25-bank sample, Deutsche Bank AG, Commerzbank AG and state-controlled BayernLB, all passed the initial stress test.
The tests examined, among other issues, banks' compliance with capital requirements, one person said.
Another person close to the matter said that there would be an additional phase of testing, both for the 25 original banks and the new, second-tier banks.
Among the additional information sought, banks were required to specify investments in 30 European countries in their trading books and loan books regarding sovereign debt, banks and "other." The deadline for submitting that information was Friday, a person said.
It isn't clear whether the information from Santander and the three German banks included the expanded criteria regarding sovereign-debt risks. The 25 banks that participated in the initial sample will probably have to submit additional information for the broader test, the criteria of which haven't been finalized, two people familiar said.
Concerns about exposure to sovereign debt in several European countries, including Greece, Spain and Portugal, have hit banking share prices and heightened concerns about the health of European banks holding that debt, especially second-tier banks without the geographic or corporate breadth to balance out weaker segments.
In line with the expanded testing, two to three banks will be examined in smaller countries, while five to six banks will be tested in larger countries, people familiar said. The banks will be picked according to market share.
"We have to find a balance between the credibility of the exercise and the number of banks we can actually get tested in that time," one person said.
Two other people with knowledge of the matter said the stress test is likely to include banks that together account for more than 50% of the sector's total assets in any EU country.
Another person said this figure would be equivalent to about 15 banks in Germany, including the Landesbanken and around 100 banks Europe-wide.
"Given the paucity of disclosure by German banks regarding their Greek exposure, we continue to believe that headline risks remain large for these institutions," said Hank Calenti, an analyst at the Royal Bank of Canada.
According to PricewaterhouseCoopers, German banks had the highest portion of non-performing loans among EU peers at the end of 2009, with a nominal value of about EUR213 billion on their books at the end of 2009. That compares with EUR155 billion in non-performing loans on the books of U.K. banks, EUR96.8 billion of Spanish banks and EUR59 billion of Italian banks, according to PwC.