UK banks and euro tumble as City scorns stress tests

UK bank shares fell by between 1% and 3% despite the fact they all cleared the European Banking Authority hurdles with ease. Analysts who were presented with hundreds of pages of data to analyse last Friday roundly criticised the tests for failing to take into account the possibility of a eurozone country collapsing and defaulting on its debt.

One major investment bank said that the four listed UK banks would need an extra 25 billion (£21.83 billion) of capital to pass its worst-case scenario. JP Morgan Cazenove went on to say that across Europe, banks had a shortfall of 80 billion against the 2.5 billion which the EBA came up with.

The euro came under renewed pressure, falling 1.17 cents to $1.4035 ahead of the crucial meeting of heads of state on Thursday. The bank stress test has done nothing to reassure global investors that the eurozone's weakest members, Greece, Portugal and Ireland, are any more stable.

Gold, silver and the Swiss franc all hit fresh record highs with investors favouring them as safe havens when avoiding European stocks and debt.

Lee McDarby, of Investec Corporate Treasury, said: "Eight banks failed the stress tests, which didn't look too bad against some expectations that presumed Italian and German banks may have failed.

While the headlines brought some relief, if you dig a little deeper into the results they do not paint a particularly comfortable picture, with 16 out of the 90 banks only narrowly passing.

Furthermore, 20 banks would have failed the stress test as of December 31 last year."

Espirito Santo analysts Joseph Dickerson and Andrew Lim said: "Our conclusion is that the large cap European banks would need an incremental 23 billion of capital under the assumption that Greece, Ireland and Portugal default and suffer real economic negative feedback loops; adding Spain and Italy into the analysis suggests a capital need of 61 billion."

Barclays was the biggest faller in London, down 7.1p at 216.3p, Royal Bank of Scotland was off 1p at 34p and fellow state-backed lender Lloyds Banking Group was 1p lower at 43.6p. HSBC was off just 4.5p at 595.9p. Among European banks Italy's second largest Intesa Sanpaolo fell 3%, Germany's Commerzbank was down 2.6% and France's Société Générale fell 3.3%.