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Moody's: Stress Tests Set to Fail 26 Banks

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Nearly one-third of 91 European banks undergoing the latest round of public stress tests could need external support to be brought up to scratch, Moody's Investors Service said Wednesday, as the sector braces for the results of the tests to be published next week.

The ratings agency said its assessment that around 26 banks "have a heightened risk of needing extraordinary external support" is based on credit-strength ratings it assigns to the banks involved. Because Moody's ratings already include the agency's own stress tests, it said it doesn't anticipate widespread ratings moves after the results come out.

The European Banking Authority, a European Union regulator overseeing the stability of the financial system, is putting the finishing touches on tests of European banks' resilience to hypothetical economic and financial shocks. Results are expected to be announced in the second half the end of next week.

Moody's said the EBA tests should have a "variety of positive effects for banks," beyond the chance of more capital injections for weaker entities. It said the tests have already prompted some banks to add capital, improved transparency around banks' sovereign exposures and given insight into regulators' assessment of banks' capital positions.

However, it said the tests will have to be viewed as credible by market participants for banks to enjoy their full benefits. Last year's tests, the first EU-wide exercise, were largely dismissed by analysts as too easy to pass, a view that was reinforced when a series of Irish and Greek banks had to be recapitalized in the ensuing months.

"While the 2011 stress test is stricter than the 2010 European bank stress test, Moody's notes that the EBA's 2011 stress assumptions do not assume a sovereign default at a time when the risk of a sovereign default within the euro area has increased," Moody's said.

EBA Chairman Andrea Enria last week said it was speculative to say how many banks, if any, might fail the tests in advance of their publication.

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