European regulators haggled over how much detail to reveal about health checks on the region's lenders in a fight that may undermine the exercise's aim of restoring confidence.
The Committee of European Bank Supervisors (CEBS) planned on Wednesday to outline its methodology for a stress test that simulates the impact of a severe economic shock on about 100 banks in the euro zone and other countries, sources close to the process said.
But that plan appeared to be derailed by renewed discussions about the scope of the test and the detail to be released when the results are due on July 23, people involved in the process said, and could even be delayed until Thursday.
It's like herding chicken, said one person at a European regulator who was involved in the discussion.
The unusual move to disclose the test's design ahead of the results would mimic the procedure of last year's U.S. stress test, which was widely credited with reviving trust in banks.
The last-minute haggling between 19 countries involved in the test over whether and how to make the design available, however, highlights fractious European Union decision making and contrasts with U.S. military-style crisis management.
Failure to come up with a stress test that meets market expectations for transparency and for a plan on how to deal with problems it reveals may even backfire.
The lack of a powerful executive and the dominance of national governments with domestic agendas was also blamed for the European Union's slow and inconclusive reaction to the Greek debt crisis, which in turn revived doubts about its banks.
There is a confidence deficit in the ability of the Europeans to execute these complex financial stability exercises, said Carlos Egea, credit strategist at Morgan Stanley.
MORE DETAILS LEAK OUT
EU policymakers decided last month to break with tradition and publish the stress test results bank-by-bank and for a much bigger group of lenders than planned, hoping they can reproduce the effect the U.S. tests had.
Markets are so far unconvinced the tests will live up to the U.S. example, which was seen to provide clarity about the banks' doubtful assets and a strict regime for how to handle problems.
Bankers involved in the stress tests said questionnaires for the test with detailed economic assumptions were sent out on Monday and had to be returned by July 15 to national regulators, which would review and may revise the banks' own assessments.
German banking sources said the scenario, designed by the European Central Bank (ECB), assumed writedowns of 16-17 percent for some bonds from the euro zone periphery and growth assumptions that are 1 to 2 percentage points below forecasts for eurozone countries.
Investors attention will not only focus on the scenario itself, however.
Providing more detail about problematic assets including periphery bonds and loan exposures to troubled pockets such as Spanish real estate or small and medium companies was one of the main hopes investors have for the stress tests.
Transparency is even more important than the scenario that is applied, said Morgan Stanley's Egea. The end result needs to be that the market really understands how much risk the banking system is carrying.
SPAIN PUSHING, GERMANY PUSHING BACK
Doubts about European banks' ability to clean up their balance sheets have limited their ability to raise funding on the market and made them highly dependent on the massive liquidity taps the ECB opened after Lehman Brothers' collapse.
The initial push for the publication of stress test results came from the Bank of Spain which said it wanted to show its banking system was stable and any shortfalls could be addressed.
Germany in particular pushed back on several counts, sources close to the process have said, including with the suggestion that the publication should only say which banks passed and which failed, without further detail.
The test is expected to cover banks in the 16-nation euro currency area as well as Britain, Sweden and Denmark. Banks tested include BNP Paribas, HSBC, Deutsche Bank, Santander and UniCredit, but also regional German landesbanks and Spanish cajas.
(Additional reporting by Philipp Halstrick, Arno Schuetze and Alexander Huebner in Frankfurt, Boris Groendahl in Vienna and Mia Shanley in Stockholm, writing by Boris Groendahl, Editing by David Holmes, Sharon Lindores and David Cowell)