Germany will stress test its most troubled banking sector--by mid-month we'll know how big the problem at the Landesbanks is

07/01/2010 9:23 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

At least we’ll know how bad it is.

That’s my reaction to news that Germany will extend its bank stress test to its Landesbanks. These banks, owned by the country’s state governments, are thought to be the most exposed to risky debt and the most undercapitalized of the country’s banks.

The original plan to stress test only the country’s biggest banks would have left the financial markets wondering how big the black hole in the Landesbank sector might be. But yesterday, June 30, regulators meeting with the Landesbanks and other German banks announced an agreement to extend the test to 16 banks, including an additional seven Landesbanks, covering about half of the market.

The consensus belief—maybe “hope” is a more appropriate word—is that the Landesbanks won’t need more money than the German bank rescue fund has available.

Available funding right now totals $300 billion in loan guarantees and a bit over $60 billion in cash. The Landesbanks can also count on some help from German state governments.

If, when the results of the stress tests are revealed around the middle of this month, the extent of the problem is no more than the bank rescue fund can handle, then I think financial markets will breathe a sigh of relief. A huge worry about the banking sector in what is supposed to be the Euro Zone’s strongest economy will have gone away.

That makes the stress test results the next critical milestone in the euro debt crisis. From an original plan to test just 26 banks in all of the Euro Zone, the plan has expanded to include 100 banks representing about 50% of the market by assets in the major euro economies.

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