EU banks stress test

The announcement:
The Committee of European Banking Supervisors (CEBS) announcement showed that the EU banking sector is in much better shape than the market had expected. The committee announced that the stress test found that 91 banks in the 20 EU economies could face around EUR 566 billion in total potential losses in a deteriorating economic and financial environment over a two year period. However, only seven banks were deemed to have failed the test, coming up short by a combined EUR 3.5 billion in capital. Out of the seven banks, five were Spanish, one was a German bank and one a Greek bank.
Both the amount of capital shortfall and number of banks deemed to have failed the test were significantly lower than market expectations. With market expectations that close to 20 banks could fail the test and that could result in a net cumulative capital shortfall of around EUR 30 to EUR 90 billion. While the figures announced were significantly better than market expectations, questions are being asked over the toughness and inconsistencies in the testing methodology. It took sometime for the market to interpret the results and reaction was fairly muted reflecting that the worst hopes were not realized.