A total of €71.5 billion was set aside in 2013 by the 20 biggest listed banks involved in the exercise, a Reuters analysis of their new annual reports shows. Many also boosted capital ratios by raising cash and hoarding profits.

 

If replicated across the 128 lenders subject to tests the European Central Bank aims to complete by October, it could mean no bank will fail or be forced to raise large amounts of new capital. Such limited consequences helped discredit previous tests by EU financial watchdog the European Banking Authority (EBA) - one reason the ECB is keen to show that its new exercise will truly be tough on the region's banks.

 

While some analysts have suggested that a failure by the ECB to force the closure of any euro zone bank after its own tests could again undermine the credibility of the exercise, many see it as more important that the ECB's scrutiny creates a stronger banking system - something the data suggest is happening.

 

ECB President Mario Draghi himself has highlighted progress already made since they learned of his plans and said this month he was "pretty confident" that the testing regime would "find a stronger banking system than we had before announcing it".

 

The EBA, which will coordinate this year's stress tests with the ECB, said investors were interested not just in whether banks pass or fail but their sensitivity to stress and how supervisors deal with the results.

 

The main wild card in the ECB's tests, and their main enhancement over the EBA's previous efforts, is an assessment of whether banks have recognised all their impaired loans and set aside enough to cover losses. If the ECB concludes the loans are overvalued, this will push capital ratios down.

 

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