Germany’s Merkel says conditions in key bank review will be “very realistic”

Germany’s Merkel: stress tests credible

BERLIN — German Chancellor Angela Merkel sought to counter skepticism about Europe’s bank stress tests ahead of their publication, saying Wednesday that the scenarios against which banks’ strength is to be tested will be realistic enough to be credible.

The results on 91 banks across the continent, measuring how they would perform if the economy worsens, are to be published Friday. The exercise is meant to lift the cloud of uncertainty surrounding their potential losses from the debt crisis, but some analysts have questioned whether the tests will be tough enough to make people confident in the results.

Merkel noted that the tests come after European leaders agreed earlier this year on a rescue package for debt-laden Greece and on another one of nearly $1 trillion for the eurozone as a whole. Those packages backstop governments’ ability to pay off on the bonds held by banks.

“I think that, measured by the real situation, the conditions for these stress tests are very realistic,” Merkel said at a news conference.

“The euro is embedded in a large rescue package at the moment,” she said. “If we had done these stress tests on the banks before the rescue package, we would of course had to act differently.”

U.S. stress tests last year helped to shore up confidence after 10 of 19 banks failed tests and were told they needed to raise around $75 billion.

Most of the 91 European banks are expected to pass — but analysts say some must fail for the tests to have any credibility. Failure won’t necessarily mean the banks are bust, but that they will need to raise money from investors or governments.

The German business daily Handelsblatt reported, citing unidentified financial sources, that Germany’s Hypo Real Estate Holding AG is the only one of 14 German banks being tested that is currently on course to fail.

Hypo Real Estate, a commercial property lender, is gradually being nursed back to health after being nationalized in the wake of the financial crisis and has long said it expects to require more capital. The bank refused to comment, as did Germany’s financial regulator, central bank and government bank rescue fund.

Merkel said she didn’t have the stress test results yet but “one hears this and that, and what I hear regarding Germany with a view to HRE is certainly plausible.”

However, she added that “we don’t need to carry out stress tests in which we take the self-flagellation so far that we assume completely unrealistic things.”

Hypo Real Estate’s earnings are still weighed down by hefty loan-loss provisions and the company has said it does not expect to return to profitability before 2012.

The government’s financial sector rescue fund already has injected euro7.7 billion ($9.9 billion) in capital into the bank, whose management last year said it likely would need up to euro10 billion in total. Earlier this month, a so-called “bad bank” was set up for Hypo Real Estate, which plans to offload troubled assets nominally worth up to euro210 billion into the government-guaranteed vehicle during this year’s second half.