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Unstressed Banks Are Falling Behind

While the worst seems to be over for the big banks that got stress-tested in the first quarter, bigger problems may be brewing for those that flew under the radar of fiscal policymakers.

Although stress tests for the U.S.'s largest banks were initially criticized for causing more harm than good, they seem to have worked in the favor of banks, shareholders and the stock market as a whole. By contrast, those banks that weren't tested at all are suffering. RBC Capital Markets estimates that of the top 100 financial institutions that weren't tested, 60 percent would have failed to pass the Federal Reserve's criteria.

That figure raises questions as to the true health of the other 8,000 banks in the U.S. that weren't tested. Among smaller U.S. banks, 32 have already failed this year. The most recent was America West Bank in Utah. "Smaller" doesn't mean insignificant, either: America West had assets of $299.4 million, and deposits totaling $284.1 million.

This trend of unmonitored U.S. banks suffering worse than those which went through the rigors of the stress tests is similar to what's happening in Europe right now. In Euroland, there have been no official stress tests and regulation has been light-touch by comparison.

Worst hit there is the German banking system, which is suffering badly from inadequate capitalization and even lawsuits.

"Compared to the U.S., the European banking system is rapidly being left behind. If anything, the rally that has taken place has allowed complacency to come back at the bank level and at the policy level," UBS bank analyst Philip Finch told the Wall Street Journal Tuesday.

The Journal points out that European banks have raised only about 40% of the $1 trillion they need to cover losses since the beginning of the financial crisis, while U.S. stress-tested banks have raised two-thirds of the $666 billion the IMF has said that they need.

That's as good a sign as any that for the time being, regulators ought to keep putting banks under a bit of pressure.

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