Since the EU began crumbling some months ago, investors have been eagerly anticipating the results of bank stress tests that should bring some much-needed transparency to the marketplace. Announced in mid-June, the stress tests cover more than 90 banks in 20 different European countries. Although it's not completely clear what the criteria are for passing the test, sources indicate that a 6% core tier-one capital ratio is the benchmark being applied -- although the time frame under which banks can raise additional capital is not known.
Early indicators
There are many reports out already trying to predict which institutions are going to fail and which will pass. It really is, however, anyone's guess as to what the results will be. Nevertheless, there does seem to be a rhyme or reason to some of the hypotheses.
Primarily, Spain has been a big backer of the stress tests, as it feels its two big banks, Banco Santander
Bank of Ireland
German banks, not surprisingly, should have no problem with the capital requirements. About 14 banks are being tested, among them Commerzbank and Deutsche Bank
Unfortunately, Greece's National Bank of Greece
Swiss banks were not included in the stress tests, although the country says it's doing its own round of housecleaning. Big players such as Credit Suisse and UBS AG
The Foolish bottom line
Europeans and investors alike are hoping this round of stress tests can do for the EU what the stress tests of 2009 did for the U.S. economy. Adding transparency and commonalities among banking institutions helped aid the American recovery in the second half of last year, and the EU could certainly use a dose of that medicine. Let's just hope there aren't any unfortunate surprises.
Which banks do you think are most likely to fail? Sound off in the comments box below!