Perilous Times
Seven EU banks fail stress tests
Frankfurt financial district A total of 91 banks from across Europe
were tested
BBC - Seven of the 91 European banks that underwent stress tests have
failed the healthchecks, the Committee of European Banking Supervisors
(CEBS) has said.
They include five Spanish banks - Diada, Espiga, Banca Civica, Unnim
and Cajasur. The other two were Germany's Hypo Real Estate and Greece's
ATEbank.
The tests assessed banks' ability to survive future economic shocks.
The seven banks would need a total of 3.5bn euros (£3bn) of new capital
to meet the standards required, CEBS said.
"[The failed banks] will have to agree with their respective
supervisors a plan over a given time period which will explain how this
weakness will be resolved," CEBS chairman Giovanni Carosio said.
BBC business editor Robert Peston said that on the face of it, the
results appeared to be "good news", but questioned how severe the tests
were.
The weekend will be an anxious time for banks, as they wait to learn
whether it will become easier or harder for them to borrow, when
markets open on Monday, he added.
Some analysts are already arguing that the tests were not strict enough.
"What seems to have occurred is a compromise amongst European banking
regulators, with many questioning if the bar had been set way too low
in testing the European banking sector," said Mark O'Sullivan of
foreign exchange firm Currencies Direct.
"It seems the tests may have raised more questions than they have
answered and in the coming weeks, it will be the interbank lending
markets that will have the real answer as to whether real confidence
has returned to the European banks."
But Vitor Constancio from the European Central Bank said the tests were
very extensive.
Reassurance
The stress tests were conducted on a bank-by-bank basis, in a move
designed to reassure investors over the health of Europe's financial
sectors.
The most severe test looked at an adverse scenario, assuming a
"double-dip" recession over the next two years, as well as a sovereign
debt shock - some kind of financial crisis for European governments
such as Greece.
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Vitor Constancio: "These stress tests are the more extensive and the
more severe that have been conducted in developed countries on such a
scale"
The seven banks failed because in this scenario, it was deemed that
their "tier one" capital ratios - the strictest measure of capital -
would fall below 6%, the threshold set for the test.
In its report revealing the aggregate outcome of the tests, CEBS said
that the 6% threshold was used as a "benchmark solely for the purpose
of this stress test exercise".
"This threshold should by no means be interpreted as a regulatory
minimum... nor as a capital target reflecting the risk profile of the
institutions."
Banks that are supervised in the EU need to have a regulatory minimum
of 4% tier one capital.
CEBS added that failing to meet the 6% threshold did not mean a bank
was insolvent.
'Preparedness and resilience'
The UK's four major banks - RBS, Lloyds, HSBC and Barclays - were among
the banks tested and all passed the tests, which were carried out by
the Financial Services Authority (FSA) on behalf of the EU.
Seven banks failing the stress test was fewer than many had expected.
Some thought the figure would be closer to 10 or 12”
"As expected, the outcomes of the stresses demonstrate the preparedness
and resilience of the UK banks under unlikely adverse economic
scenarios," the FSA said.
"This resilience is a result of the considerable work that has been
undertaken to strengthen UK banks in recent years."
The British Bankers' Association said: "UK banks have already put in
the work to rebuild their businesses and put more money aside against
future financial problems.
"It is no surprise to find they have exceeded the standards set out by
CEBS."
'Sound Spanish system'
The five Spanish banks that failed, out of 27 tested, were regional
savings banks, which racked up heavy losses following the collapse of
the Spanish property market.
Cajasur was bailed out by the Bank of Spain in May.
Following publication of the stress test results, the central bank said
in a statement: "The exercise confirms that the Spanish banking system
is sound, and in turn substantiates the savings bank restructuring and
recapitalisation process pursued over the past twelve months by the
Bank of Spain."
Meanwhile, 13 out of 14 German banks passed the tests.
"The German banking system has shown itself to be robust and proved its
resilience even under very pessimistic assumptions," financial watchdog
Bafin and central bank, the Bundesbank, said in a statement.
It added that the only German bank that failed, Hypo Real Estate, "is
currently undergoing a far-reaching restructuring process".
ATEbank was the only one of the six Greek banks that participated in
the tests to fail.
Greek Finance Minister George Papaconstantinou said the results were
positive and showed that "the Greek banking system can cope even in the
extreme conditions of a stress test".