LONDON, Friday 

Europe's biggest banks faced a double-dip recession, stock markets falling by a fifth and sharp rises in interest rates under stress test scenarios imposed by regulators.

The Committee of European Banking Supervisors (CEBS) said the stress tests assumed a double-dip recession in Europe with the economy shrinking by 3 percent over 2010 and 2011.

Banks failed the test if they were unable to maintain a Tier 1 capital ratio of 6 per cent under each scenario.

In banking books, equity holdings in the available-for-sale portfolios were stressed to assume stock markets plunge 20 per cent in both years, a cumulative rout of 36 per cent that puts shares deep into bear market territory.

Credit ratings on holdings of securitised products were downgraded by four notches across the board, CEBS said.

Losses on sovereign debt holdings were applied only to banks' trading books, not their banking book.

European Union countries asked regulators to test the bloc's top 91 banks in a bid to help restore investor confidence in the sector's ability to withstand future shocks without more state aid.

CEBS and the European Central Bank believe its scenario has a probability of happening once in every 20 years, which they say is a more severe test than US regulators carried out on their banks last year, which was based on a once in every seven years probability.

CEBS allowed the early publication of its methodology but the bank stress test results are still set for 1600 GMT.

 Reuters