Regulators’ “stress-tests” on 91 European banks are likely to be more rigorous and disclose more detail than investors currently expect, according to Morgan Stanley.

The tests, designed to see how much damage would be done to banks’ capital strength and liquidity in the event of market shocks, are being conducted to avoid a repeat of recent financial blowups. Banks will be tested to see how they fare in the event of a shock to interest rates, government bond markets, and other events.

Neil McCleish, trading credit analyst at Morgan Stanley, praised the Committee of European Banking Supervisors' approach for showing that European regulators were taking a constructive approach to preventing future bank crises.

“The coverage of the banking system [in the tests] is now extremely comprehensive, to the point where it is impossible to object on this issue,” he said in a briefing note. He said 65 per cent of banks will be covered by the tests, surpassing the share of the US banking system involved in comparable tests.

Among the banks being tested are Dexia, KBC Group, Société Générale, BNP Paribas, Deutsche Bank, Commerzbank, Alpha Bank, Unione Di Banche Italiane, Bank of Valetta, ING, Rabobank, Barclays, HSBC, Royal Bank of Scotland, and Lloyds Banking Group.

Several of the banks in the tests operate private banking businesses. The tests could reveal whether some banking groups with wealth units are more or less vulnerable to adverse market movements than might have been the case a few years ago. The resilience of banks and the whole issue of “counterparty risk”, have become more significant for private banking clients, as highlighted by the impact on structured products from the Lehman Brothers collapse. Some banks, such as Credit Suisse and Royal Bank of Canada, often highlight their financial strength as a plus factor for private banking clients.

Last week, the Committee of European Banking Supervisors gave more details on the stress test exercise which is being finalised by CEBS and national supervisory bodies, such as the UK’s Financial Services Authority.

The exercise is being conducted on a bank-by-bank basis using commonly agreed macro-economic scenarios (baseline and adverse) for 2010 and 2011.