Banks that scraped through the European Union's stress test of 90 lenders will start feeling the heat Monday from investors to beef up capital buffers.
The European Banking Authority (EBA) said after the market close Friday that eight banks failed the test with a total capital shortfall of 2.5 billion euros ($3.5 billion).
This puny amount in European banking terms sparked a repeat of last year's accusations that the stress tests were again unrealistic given the euro zone's sovereign debt crisis.
The banks that failed are small, nearly all untraded and mainly in Spain, where banking problems have long been known.
Few analysts and regulators expect a broad sector sell-off when the opening bell rings, while the greater transparency over sovereign debt holdings could lift uncertainty over some stocks.
EBA Chairman Andrea Enria told Spanish daily El Pais he does not expect a rout in Spanish banks Monday.
It's a formidable exercise in transparency, which has not unveiled any great surprises and therefore I do not expect a black Monday. Absolutely not, Enria said.
The impact of the test is likely to be twofold.
Sixteen banks scraped through the test and analysts expect them to come under market pressure to bring capital cushions up to scratch well before the EBA's April 2012 deadline.
They include Spain's Bankia -- which is planning to list on Wednesday -- Popular, Sabadell and four more Spanish banks, Italy's Banco Popolare, Greece's Piraeus and Cyprus's Marfin.
Portugal's biggest bank Millennium bcp also nearly failed, and it set the tone for swift action by saying late Friday it would raise 400 million euros.
The second main impact of the EU's third health check of banks since the financial crisis began revolves around sovereign debt holdings of countries at the heart of the problems.
The EBA stress test result is of limited value to us as the sovereign banking book exposures are not fully stressed and it is based on a relatively low 5 percent (pass mark), JPMorgan analyst Kian Abouhossein said.
However, it offers transparency with excellent new input data, especially in respect to sovereign risk and credit exposure at risk.
Banks have warned that too much transparency, such as news of BNP Paribas'
The sovereign data may come into its own later this week.
Euro zone leaders meet Thursday in a bid to agree a second bailout for Greece and a package to address the broader fiscal woes of the euro zone that last week moved beyond Greece, Portugal and Ireland to Italy and Spain.
This broader package may include measures whereby banks agree to take a hit in some form on the sovereign debt they hold to give euro zone countries more breathing space to recover.
The test is compatible with the voluntary approach being discussed, Enria told Reuters Insider.
The EBA data showed Europe's banks held 98.2 billion euros of Greek sovereign bonds at the end of December, with two-thirds of that held by Greece's banks, 9 percent by German banks and 8 percent by France's.
Banks' exposure to Irish sovereign debt was 52.7 billion euros (61 percent held domestically) and to Portugal it was 43.2 billion (63 percent held domestically).
This sovereign debt data has been crunched by analysts at big banks over the weekend in tests that were toughened up with default scenarios -- something the EBA was barred from doing by nervous EU finance ministers.
Europe's banks would need 41 billion euros to keep their core capital ratio above 7 percent, the new global minimum from 2013 under the Basel III accord and already required by markets in practice, according to Reuters' calculations.
This compares with the 5 percent pass mark in the test.
Interactive graphic to show how banks fare when the
pass mark moves:
Reuters Insider interview: http://link.reuters.com/dyt62s
JPMorgan's Abouhossein said a tougher test of 27 of the bigger banks using EBA data would show 20 are a combined 80 billion euros short of capital.
His test applied a haircut to sovereign bond holdings in the banking book and required banks hold core capital of 7 percent.
Credit Suisse analysts said applying larger haircuts on peripheral euro zone bond holdings, including for Italy, as per current market prices, would leave a 45 billion euro deficit for 49 banks it tested.
Without market pressure, some banks may not top up capital levels as some local supervisors dispute test conclusions.
Germany's Helaba pulled out of the test just before the results were announced, disputing it would have been failed. The Bundesbank said it was happy with Helaba's capital position.
In Spain, the central bank says no lender needs to raise capital. ($1 = 0.708 Euros)
(Additional reporting by Sonya Dowsett in Madrid)