Analysts fear stress tests on EU banks are not rigorous enough

Regulator needs to examine whether lenders could withstand fresh financial shocks

Concerns about the rigour of the stress testing of Europe's banks are being raised ahead of the publication of an unprecedented health check of the continent's banking system.

The examination of 91 banks, being carried out by the EU's banking regulator in conjunction with the Committee of Banking Supervisors, will be published on Friday. The testing on around 65 per cent of the continent's banking assets investigates the potential outcomes in various adverse economic scenarios.

However, economists and analysts have said the results will only restore confidence if the EU outlines exactly how the tests have examined the banks' vulnerability to fresh financial shocks. There are fears that the potentially explosive outcome of a member country defaulting on its sovereign debt has not been tested, nor the contagion effect if a bank were to fail.

Antonio Garcia Pascual, an economist at Barclays Capital, said: "They should tell the markets what mechanisms they have used. There is no clarity on the treatment of sovereign debt risk or, for example, a bank's liquidity."

The focus on stress testing rather than preparing contingency plans for a bank's collapse has also been criticised. Ann Cairns, the managing director of the Europe office of Alvarez & Marsal, a financial advisory group, said: "What stress testing nearly 100 banks will show is that banks can withstand known levels of sovereign debt impact or a drop in GDP. But what happens if one of them collapses? Who pulls the trigger to unwind a bank in an orderly fashion and avoid contagion? The European Central Bank should be insisting on contingency plans so that they are ready for ultimate failure."

The EU's economic affairs commissioner Olli Rehn has already said the tests would identify some "pockets of vulnerability" but there were "systems in place to deal swiftly and promptly" with any risk exposure. It is expected that some of Spain's regional savings banks – the Cajas – and a few German institutions will fail the tests.

Britain's Chancellor, George Osborne, said last week that the UK's four main banks will pass, but the tests "need to be seen as credible."

Banks which fail tests may need to turn to the market to recapitalise or use state or EU recovery facilities. It is not thought there will be any immediate large-scale capital-raising after the results are published, but analysts predict high-profile mergers will follow.

In Greece, where six banks have been stress tested, its fourth-largest lender, Piraeus, made a €701m (£593m) cash bid for two state-owned banks on Wednesday. Such a move would create the country's largest bank with assets of more than €105bn.