Stress tests could reignite debt crisis, Davos hears

The European Central Bank's review of the region's lenders may reignite concerns about banks later this year as some companies will probably fail the stress test, Swiss bank UBS chairman Axel Weber said.

The stress test "may trigger a comeback of some of the concerns about banks," which could lead to a re-emergence of risks for countries that may have to provide fresh capital to the lenders, Mr Weber said at a panel discussion at the World Economic Forum in Davos, Switzerland, today.

“I don’t think that markets at this point will provide sufficient capital, at least not for the banks that are in doubt.”

The Frankfurt-based ECB is conducting a three-stage assessment of bank assets before it assumes oversight of about 130 lenders across the 18-member currency bloc this November.

UBS, based in Zurich, is not part of the ECB’s review. “It’s going to be an exam, the ECB made that pretty clear,” Mr Weber said. “An exam where everyone passes is usually viewed as not being a credible exam. And I expect some of the banks not to pass this test. Despite the pressure from politics, some will not pass.”

The risks that are still lingering in Europe are currently being disregarded in the financial markets, though as November approaches speculators may start betting on the possible winners and losers of the stress test, Mr Weber said.

Such bets on the companies’ subordinated bonds, which might be used to shore up lenders that are short of funds, would reinforce the need for government action, he said.

The stress tests and the elections to the European Parliament are the two main risks Mr Weber sees to the region's economic upturn this year, he said, calling the recovery "lacklustre" and "uneven across European countries." "I'm really still concerned," Mr Weber said. "The mood in the financial markets may have improved, but the economic situation in most European countries will not improve in this year. There may be some risks again coming back."

Bloomberg