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Biggest risk for 2014? Stress tests: Van Steenis

European bank stress tests are one of the world's biggest risks going into 2014, Huw van Steenis, head of European financial services research at Morgan Stanley, has told CNBC.

Speaking at the World Economic Forum in Davos, van Steenis said investors were eyeing the tests to ensure the sector has "brought out the bodies" from the past.

"There are plenty of risks out there and through this year, a critical event for me is getting through the stress tests and the asset quality review," he said.

"We need to know that European banks are cleaned up, and that's a key risk I'm watching for."

(Read more: 'Doom loop' spells danger for Europe's debt markets)

The European Central Bank (ECB) has developed has a set of tough criteria for its stress tests of the euro zone's banks, designed to analyze lenders' ability to withstand adverse economic conditions. The region's 128 most important banks will undergo an assessment of their risky assets, the quality of their balance sheets, and the amount of capital they hold.

"For the top 20 banks, I think it will show that on the whole that they are reasonably well capitalized," Van Steenis said. "Of course – like any exam – there will be (banks) that pass and fail."

Ralph Orlowski | Getty Images News | Getty Images

But although the banks in some European countries have already been examined by external observers, van Steenis stressed, some – such as those in Italy and Holland – had not,

"It's more shedding light on those markets which maybe still have some legacy assets to clean up," he said.

(Read More: Euro zone bond rally may be ending: Here's why)

The ECB's year-long review could prove crucial to the region's banking sector, which has been at the heart of the euro zone's financial crisis after taking on too much debt which turned toxic when borrowers struggled with their repayments.

A number of European governments were forced to step in and rescue their struggling institutions – deemed in many cases "too big to fail" – which in turn hit the solvency of these already debt-laden countries.

One issue that came to light following the crisis was the amount of sovereign bonds held by a country's domestic banks. This led some analysts to warn that the link between weak governments and weak banks is creating a "doom loop" with the potential for banks and governments to drag one another down during a crisis.

But Van Steenis disagreed, arguing that banks needed to own these bonds.

"I think there's a misnomer – people have been overly excited about the sovereign risk in (Spain's and Italy's) banks," he said.


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