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European bank ratings unaffected by CEBS stress test results

The results of the stress test, which the Committee of European Banking Supervisors (CEBS) has conducted on 91 European banking groups, will not affect European bank ratings, says Moody's Investors Service says in a new report.

Moody's says the CEBS stress test results do not represent a surprise from a credit assessment point of view. Among other factors, the results are consistent with the rating agency's recent research, which had anticipated that most EU banks could absorb an economic shock without being required to raise capital. Moreover, the results are in line with Moody's ratings (as implied by Moody's Bank Financial Strength Ratings (BFSRs), which measure a bank's stand-alone creditworthiness independent of any government support).

Moody's new report, entitled "CEBS Stress Test Results: European Bank Ratings Unaffected", compares the CEBS stress test results with the rating agency's own stress test and ratings, and provides its views on the potential credit outcomes of the EU authorities' recent actions.

As Moody's continues to assess the likely future direction of European banks' creditworthiness as part of the rating process, it will continue to closely monitor how the failed banks intend to raise capital and the likelihood that they will be successful at implementing these plans.

The rating agency believes that the markets' reaction to the release of the stress test results will be an important factor that will shape the operating environment of EU banks. Although Moody's expects that greater transparency will contribute to restoring investor confidence in EU bank debt and equity in the near term, the rating agency also expects greater selectivity in investors' investment decisions, particularly as investors begin to anticipate a stabilization of economic conditions and, more importantly, a reduction in government support.

This may be credit-enhancing for some, but could also continue to be a source of pressure for others, especially for those banks that passed the test by a small margin and have no specific plan to positively alter their risk profile. (BBJ)