Stress begins to show as banks tumble

BANKING stocks took a hammering yesterday as investors got their first chance to react to the publication on Friday night of the European banks' stress test results.

Barclays, Royal Bank of Scotland and Lloyds Banking Group each lost more than 6 per cent of their value despite none of the UK banks failing the test.

The sell off among the banks dragged the FTSE 100 index down 90.85 points or 1.6 per cent to close at 5,752.81. European stocks lost 1.7 per cent of their value, sinking to their lowest levels since early December.

Commentators said the markets were worried that the stress tests had been too lax because they had not simulated Greece defaulting on its sovereign debt. Michael James, senior trader at Wedbush Morgan, said: "Even though there weren't that many banks that failed, the results still seemed to make people a little more cautious."

While shares fell, gold headed in the opposite direction, hitting a record high above $1,607 an ounce, having risen more than 3 per cent last week for the second week on the trot, a feat that the investors' safe heaven had not achieved since February 2009. With fears growing that the debt crisis could spread to Italy or Spain, the eurozone's third- and fourth-largest economies, Spanish ten-year government bond yields rose to 6.36 per cent, their highest since the introduction of the euro. The Italian equivalent rose above 6 per cent.

The pound was up against the euro at €1.14 but was down at $1.6 against the dollar.

The four UK banks were among 90 tested by the European Banking Authority to assess how their finances could stand up to much lower growth, lower stock markets and higher interest rates. Only eight of the 90 banks tested failed, though a further 16 only scraped through.

RBS, which at 6.3 per cent was the nearest of the UK's banks to the pass mark of 5 per cent for the cushion of core tier one capital, declined 2.12p to 32.97p.

Lloyds, which held 7.7 per cent capital, was the biggest faller, down 3.34p at 41.34p. Barclays, which is believed to have a high level of exposure to the debt-pressured countries on the Iberian peninsula, was down 15.65p at 207.65p. It held 7.3 per cent tier one capital.

UK Financial Investments, which manages the UK government's stake in the bailed out banks, said in its annual report that shares in Lloyds and RBS need to rise to 63.1p and 49.9p respectively before the Treasury can recoup its money.

HSBC, which at 8.5 per cent capital was the highest scoring of the UK banks, fell 8.7p to close at 591.2p.

In the FTSE 250 index, Thomas Cook shares fell despite its announcement of a one-year extension to its 1 billion banking facilities through to May 2014.Shares, which were last week rocked by a third profits warning within a year, fell 3.5p to 67p.

Among the Scottish stocks, Stirlingshire-based Pinnacle Telecom fell 5.3 per cent or 0.02p to close at 0.35p despite announcing the successful completion of three music festival contracts.