Debt worries knock UK banks

Worries about the impact of the European debt crisis knocked the UK's top four banks again today, even though all passed last week's European stress test.

Shares in Barclays, HSBC, Lloyds Banking and Royal Bank of Scotland all fell as analysts said the tests did not take into account the full likelihood of a Greek debt default.

The four were among 90 banks tested by the European Banking Authority to assess how their finances could stand up to much lower growth, lower stock markets and higher interest rates. Only eight of the 90 banks tested failed, though a further 16 only scraped through.

Royal Bank of Scotland scored lowest of the UK banks at 6.3%, though still well above the pass mark of 5% for an acceptable level of core tier one capital, a key measure of a bank's strength.

Barclays held 7.3% tier one capital, HSBC had 8.5% and Lloyds Banking Group held 7.7%.

The tests assumed a 25% write-down on 10-year Greek government bonds held by Europe's banks, but analysts suggested this was too generous as market prices currently stand at a 50% mark-down.

Broker JP Morgan added that if stricter criteria of 7% capital and more significant write-downs on holding of sovereign debt were included, UK banks would have had a 25 billion euro (£22 billion) shortfall.

Gareth Hunt at Investec added it was still not clear what impact the worsening of the European sovereign debt crisis might have on the banks directly - or indirectly - and that it was hard to draw many conclusions other than the UK banks will probably be OK.

The Independent Commission on Banking report on September 12 is a more pressing issue for the UK banks, he added.

Yields on Italian and Spanish bonds rose further today, suggesting the stress tests had done little to allay the fears of debt contagion

On Thursday, EU leaders meet to discuss financial stability in the eurozone and a second bailout for Greece.

Shares in Barclays and Royal Bank of Scotland both fell by 3%, to 216p and 34p respectively, Lloyds gave up 2% at 43.7p while HSBC dropped 1% to 596p.