Eight European banks fail EU stress tests

15th July 2011, Comments 0 comments

Eight European banks failed stress tests, the EU regulator revealed on Friday, with banks under rising pressures from the eurozone debt crisis now affecting Italy and Spain.

Five of the eight failures are Spanish.

The eight institutions, also including two Greek banks and one Austrian bank, have failed to meet the European Banking Authority's new capital requirements, the EU regulator said after testing 91 banks.

In addition, one German bank was considered to have failed but this was yet to be confirmed.

"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.

"In addition, 16 banks display a capital one tier ratio of between 5.0 and 6.0 percent," the statement added.

The EBA wants each group to have liquid reserves -- which serve as an essential buffer against unforeseen financial shocks -- totalling five percent of the lender's loans, bonds and securities.

The tests were intended to reveal which banks would not have strong enough balance sheets to withstand a big shock in the financial system, and will outline their levels of sovereign debt exposure.

The EU's London-based regulator for the financial sector carried out assessments on 91 banks representing 65 percent of the sector.

European Union finance ministers have said that help from EU governments would be available for any bank failing to meet the 5.0-percent benchmark.

But the tests have already raised serious concern among some investors because they will not envisage a potential sovereign default in the eurozone, which has been plagued by a possible Greek default for quite some time.

German regional bank Helaba had already disclosed that it has failed to pass ahead of Friday's official results.

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.

Of the 91 lenders examined in 2010, five in Spain, one in Germany and one in Greece failed to pass.

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.

Ireland's banks passed the new tests.

Three years on from the global financial crisis many developed nations are buckling under the weight of huge public spending and bank bailouts which were aimed at fixing the financial mess.

That has shifted the spotlight onto the eurozone's most fiscally-challenged nations -- Portugal, Ireland, Italy, Greece and Spain -- and sparked genuine concern over the euro's future.

The International Monetary Fund and European Union have already bailed out Greece, Ireland and Portugal to the tune of hundreds of billions of euros, while the initial Greek rescue package has been deemed insufficient.

© 2011 AFP

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