Waiting for D-Day: Europe's Financial Giants Nervous Ahead of Stress Test Release

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The criteria by which the banks are being tested have been highly controversial in the EU. "The result of that discussion was a political compromise," says Merck-Finck analyst Konrad Becker. The stress scenarios ultimately designed have been harshly criticized by bankers and observers. German banking expert Wolfgang Gerke, for example, believes the test is "too gentle."

And Udo Steffens, president of the Frankfurt School of Finance and Management, doesn't believe the results will be very revealing. "No country can allow for a majority of its banks not to pass the stress test," he says dryly. "And it has been conceived with that in mind."

In addition, it remains entirely unclear which data sets will actually be published. Because of the individual design of the tests, it will be difficult to directly compare the results. They will also be worth little if the precise methods of calculation aren't published as well, argues analyst Becker.

In summing up the sentiment revealed in interviews with top bankers, Germany's Börsenzeitung website writes: the affected bankers don't know anymore whether they should laugh or cry. They remain entirely unclear about the precise criteria that will be used by European banking supervisory organization CEBS to determine whether a bank has "passed" or not.

In the final days before publication, insiders are speaking again and again about the magical 6 percent limit. Under that scenario, the core capital ratio of Germany's three most troubled banks could slip below that line. But Börsenzeitung has reported that the figure for the core Tier 1 capital ratio has not been set in stone.

On the contrary. The website quotes a letter from BaFin to banks that seems almost ludicrous. In it, institutions are asked to provide an "estimate" of "what kind of minimum core capital ratio their houses would need to show -- even under the most adverse scenarios in the EU stress tests -- in order to achieve the desired quieting of the market." In other words, banks are expected to judge for themselves whether they believe their financial resources are sufficient or not.

By now, though, the stoically communicated measure of 6 percent has already become the benchmark that is generally expected by the markets. Experts believe this is a problem. Cologne-based banking professor Thomas Hartmann-Wendels recently warned against the "hype" that has been generated by the stress tests. They are ultimately only one of many indicators "that help to determine how stabile a bank is." Analyst Becker also warns there is a danger that the data will be interpreted "too systematically."

Becker still believes there could be benefits in the test. Stress tests like the one being released on Friday create more transparency in an industry that is normally shrouded in secrecy. It could also ultimately foster greater uniformity in accounting. But more tests must be conducted in the future in order for that to happen. "My great hope is that this will lead to an institutionalization of the procedure," Becker says.

If a new test run were done once every one or two years, it would also solve a further problem: This time, the only one crisis is being staged, one in which the most recent events in Europe are being recreated. It focuses on a scenario in which countries have fallen into financial difficulties. In that sense, its significance is also limited. But future tests could simulate other dangers, Becker says, like a crash of the commodities markets or a collapse of the real estate market in China. That would incrementally expand our knowledge about the stability of our financial institutions.

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• Part 1: Europe's Financial Giants Nervous Ahead of Stress Test Release
• Part 2: Who and What Will Be Tested?
• Part 3: Are Any German Banks at Risk of Failing?
• Part 4: What Happens to Banks that Fail or Barely Pass the Test?
• Part 5: Are the Tests Truly Helpful?