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Europe reacts to Fed stress test news

A pedestrian walks by a CitiBank branch office on April 18, 2011 in San Francisco, Calif.

David Brancaccio: When the Federal Reserve tried out those "bad case scenarios" on the banking system, it turned up some red alerts about Europe.

Marketplace's Stephen Beard joins us live from London. Stephen, good morning.

Stephen Beard: Good morning, David.

Brancaccio: Stephen, I see CitiGroup, and some other banks, own quite a lot of European debt -- debt that could go bad?

Beard: Yes. I mean, CitiGroup has been badly hit, undoubtedly, by its exposure to the eurozone debt crisis. Citi points out, however, that even with these losses, it would have passed the stress test. It only failed because the Fed objected to Citi's plans to increase it's payout to shareholders. One leading bank analyst here thinks CitiGroup's failure is pretty alarming.

Brancaccio: Alarming -- you have my full attention here.

Beard: All right. This is Ralph Silva of the research house SRN. And he says he finds it extraordinary that stock markets are celebrating on the back of these stress test results, given the fact that Citi has not been given a clean bill of health.

Ralph Silva: I am amazed and surprised at the optimism of the American market right now. The size of Citi, and the ability of Citi to bring down the entire financial services industry by itself leads me to believe that we're missing something fairly big here.

Other analysts here, however, have been more positive, saying the tests show that overall, the U.S. banking industry is in a healthier state than it was -- and certainly healthier than European banks. After all, no U.S. bank has been told to increase its capital immediately, whereas here in Europe, banks are still scrambling to beef up their balance sheet.

Brancaccio: Marketplace's Stephen Beard, thank you very much.

Beard: OK, David.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.
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