Eight European banks fail EU stress tests
European Banking Authority
(LONDON) - Eight European banks, including five from Spain, failed crucial EU stress tests, the bloc's financial regulator said on Friday, with lenders facing rising pressures from the eurozone debt crisis.
Two Greek banks and one Austrian bank also failed to meet the European Banking Authority's new capital requirements, the regulator said in a statement after testing 91 banks.
The EBA said the eight banks had a total shortfall of 2.5 billion euros ($3.5 billion), while the total number of failures was less than expected by markets although critics felt the examination was not as tough as it should have been.
They said the tests did not include the possibility of a sovereign debt default, a prospect many believe is very likely for bailed-out Greece, and should have done so to give a true picture of their underlying strength.
"The EBA's 2011 stress test exercise shows that eight banks fall below the capital threshold of 5.0 percent capital Tier One ratio over the two-year time horizon, with an overall capital tier one shortfall of 2.5 billion euros," the EBA said.
"In addition, 16 banks display a capital one tier ratio of between 5.0 and 6.0 percent."
The European Commission said that banks which failed the tests or came close to failing should begin efforts to recapitalise, even though EU finance ministers had said that government support for them had been agreed in principle.
The EBA wants each bank to have liquid reserves -- which serve as an essential buffer against unforeseen financial shocks -- of at least five percent of the lender's loans, bonds and securities.
The results also revealed that all the tested banks have an aggregate exposure of almost 200 billion euros to the sovereign debt of the three bailed-out eurozone members, Greece, Ireland and Portugal.
Irish and Portuguese banks passed the EBA stress tests.
"Europe's banking sector is not out of the woods yet," said Kathleen Brooks, research director at Forex.com trading website.
"The stress tests were as expected, no surprise that the Spanish banks fared the worst, however, the fact that only eight banks failed the tests isn't going to inspire that much confidence."
Analysts had forecast that between 10-15 banks would fail.
"The results stressed that if there had not been a large amount of capital raised in the first four months of this year, then 20 banks would have failed the test with a capital shortfall of 26.8 billion euros," Brooks noted.
The euro, for which the entire future is caught up in the eurozone debt crisis, strengthened slightly against the dollar after the stress test were published.
Europe's single currency was trading at $1.4172 in New York afternoon deals, compared to $1.4141 on Thursday.
The London-based EBA carried out assessments on 91 banks representing 65 percent of the sector.
Ahead of the results, some investors raised serious concerns about the tests because they did not envisage a potential sovereign default in the eurozone, despite Greece seen as being close to the edge of bankruptcy.
However EBA chairman Andrea Enria strongly defended the process at a press conference on Friday, insisting it was "rigorous" even if "the sovereign debt situation has moved on since this scenario was set."
The two Greek banks to fail the tests were EFG Eurobank and ATEBank.
Eurobank had a core Tier One capital ratio of 4.9 percent, just below the minimum threshold of 5.0 percent, while ATEBank flunked with minus 0.8 percent.
"The results of the exercise are encouraging as regards the capital standing of our banks, which, following urgings also by the Bank of Greece, carried out capital increases and took business actions to reinforce their position," Bank of Greece governor George Provopoulos said in a statement.
Spain insisted on Friday that its five banks that failed the tests would not need additional capital because the country was already restructuring the troubled sector.
Four regional savings banks -- Caja Mediterraneo (CAM), CatalunyaCaixa, Unnim and CajaTres -- failed the tests, along with Banco Pastor.
Spain's lenders, especially its regional savings banks which account for about half of all lending in the country, have been heavily exposed to bad debt since the collapse of the property sector at the end of 2008.
The remaining bank confirmed to have failed was Austria's Volksbank.
The regulator had said that the purpose of the tests was "to assess the resilience of European banks to severe shocks and establish a common, conservative stress testing benchmark."
They sought to establish whether the banks could weather a series of adverse scenarios over the next two years, including a worsening of the eurozone sovereign debt crisis, a global negative demand shock in the United States, sliding property markets, and major depreciation in the dollar.
The new tests were also designed to combat criticism over last year's banking sector review which found that just seven out of the 91 European banks inspected were vulnerable to economic stress.
Two troubled Irish lenders, Allied Irish Banks and Bank of Ireland, passed the tests but subsequently had to be nationalised, and later the Irish government had to be rescued with an enormous multi-billion-euro EU-IMF bailout loan.