Seven EU Banks Fail Stress Test, Face $4.5 Billion Shortfall


Bloomberg | Jul 23, 2010

Seven European Union banks failed the region’s stress tests with a combined capital shortfall of 3.5 billion euros ($4.5 billion), according to the Committee of European Banking Supervisors, which coordinated the initiative. “National authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalization,” the committee said in a statement on its website today. EU regulators scrutinized 91 of the bloc’s banks to assess whether they have enough capital to withstand a recession and sovereign-debt crisis, with a Tier 1 capital ratio of 6 percent as a floor. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.

“If no one fails, everyone would question the legitimacy,” said Florian Esterer, who helps manage about 60 billion Swiss francs at Zurich-based Swisscanto Asset Management. “I’m pessimistic about the results boosting confidence in the markets,” he said before publication of the tests. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests are set to ignore the majority of banks’ holdings of sovereign debt, investors said. “The tests need to be across the board,” said Andrea Williams, who manages about 1.1 billion pounds ($1.69 billion), including ‘BNP Paribas SA and Credit Suisse Group AG shares’, at Royal London Asset Management in London. “It does undermine the whole credibility of the tests.”   

Test Criteria

Regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1 percent on Greek debt, 12.3 percent on Spanish bonds, 14 percent on Portuguese bonds and 4.7 percent on German state debt, according to CEBS. The tests also assessed the impact of a four-step credit rating downgrade on securitized debt products, a 20 percent slump in European equities in both 2010 and 2011 and 50 other macroeconomic parameters, including a drop in the EU’s gross domestic product over two years, CEBS said. BNP Paribas, Societe Generale SA, Credit Agricole SA and BPCE SA, France’s four largest banks, each have enough capital to outlast an economic slump and a sovereign debt crisis, the Bank of France said. In Germany, Hypo Real Estate Holding AG, a property lender that was taken over by the state was the only bank to fail among the 14 that were tested, the Bundesbank and the nation’s financial regulator, BaFin, said in a joint statement today. Agricultural Bank of Greece SA said it also fell short.

Spanish Institutions

Spain makes up the biggest portion of the exams, with 11 merged and eight individual savings banks as well as eight commercial banks. Five of the companies failed the tests, according to the Spanish savings bank association. The tests also examined four U.K. lenders. The evaluations, which came two years after the U.S. subprime mortgage crisis roiled global financial markets, covers 65 percent of the EU banking industry. Tests carried out in the U.S. last year found 10 lenders, including Bank of America Corp. and Citigroup Inc., needed to raise $74.6 billion of capital. Publication helped lift the Standard & Poor’s Financials Index 36 percent from the start of May through the end of last year. The 54-member Bloomberg Europe Banks and Financial Services Index rose about 9 percent in July on speculation that most lenders would pass the tests.

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