Rule-breakers know the best way to  stay out of trouble is not to get caught. The same applies  to stress  tests. The financial   institutions are redoubling their efforts to raise capital   and avoid a regulatory reprimand. They  have raised €35.5bn in capital since last July, according to research by Morgan Stanley.  Nearly €26bn of that comes from equity issuance, while an additional  €6bn comes from divestments specifically for capital-raising  purposes. Banks reaped an extra €3.7bn from unwinding their  "carry trade" - taking cheap loans  from the ECB, investing   in higher yielding government bonds and using the gains to  take more provisions on bad debts. More is set to come. Excluding gains from carry  trades, peripheral banks in Italy, Greece, Spain and Portugal  have accounted for €26.7bn of the capital raised. The  troubles of some banks in the eurozone periphery, such as Italy's  Banca Monte dei Paschi di Siena, have been well documented.  But some analysts think bigger banks could be in for a shock  if regulators increase their risk-weights to assets - which  determines the amount of capital that must be held. "The real surprises will be some of the big banks who are considered  safe but are not," says Alberto Gallo, head of European macro  credit research at RBS. "There is almost an inverse  relationship  between the size of banks and how much regulatory risk they  declare - some large investment banks have "optimised" their  models over time to show their assets are less risky." Deutsche  Bank is one such behemoth under scrutiny  over  its  capital  strength. Germany's biggest lender says it is prepared to raise  equity in the next two months if regulatory pressure worsens.   In addition, many German banks are exposed to lending that  is both capital intensive and illiquid, such as shipping and  commercial real estate, which could take a hit after the stress  tests. "The majority of German banks subject to the AQR and  stress test are engaged in capital-intensive asset-based finance  activities, which will probably lead to some visible impact  on those banks' stressed capital ratios under the ECB's  tests,"  says Carola Schuler, a banking analyst  at Moody's. At least  markets are supportive.  With economic recovery in prospect  and a conviction that the worst of the eurozone crisis is over   there is a strong appetite among investors to plough money  into eurozone banks.

(Christopher Thompson)