The listed banks in the EU’s latest stress tests would have to raise close to €900bn to convince investors they have enough capital to withstand another crisis, a feat that would allow them to finally overcome their weak valuations, three academics have argued.

“The market has a very different view on how risky bank portfolios are as opposed to what the Basel supervisors (who make the capital rules) say,” says ZEW’s Sascha Steffen, one of the report’s authors.

The European Banking Authority will publish the results of stress test on 51 banks on Friday night. Instead of a traditional ‘pass/fail’ mark, the tests will show how banks’ key capital ratios would respond to various shocks. Regulators can later decide if they want banks to raise cash or take other actions.

Mr Steffen and hi co-authors — NYU Stern’s Viral Acharya, University of Lausanne’s Diane Pierret and University of Mannheim and ZEW’s Sascha Steffen — argue that the 2014 euro zone stress tests, which showed a capital need of just €25bn across 130 banks, were a failure because they did not adequately reflect the real risks in the banks.

They point out that the 34 listed banks in the latest stress tests have lost an average of 33 per cent of their book value since those stress tests were carried out less than two years ago, suggesting that investors had little confidence that the banks had properly restored their balance sheets. Before the 2014 tests, Mr Acharya and Mr Steffen wrote that the eurozone banks alone could need more than €770bn — 32 times the capital shortfall actually identified.

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