Seven banks fail EU stress tests, most cleared

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Seven banks, mainly in Spain, failed European crisis "stress tests" on Friday when regulators declared the sector sound overall, but many analysts scorned the exam for passing doubtful cases.

Governments are already working with the seven weaklings -- five in Spain and one each in Germany and Greece -- to help shore up their finances, said the Committee of European Banking Supervisors (CEBS) which did the crash tests.

Out of 91 banks tested for resistance to economic upheaval, German state-owned lender Hypo Real Estate, Greece's ATEBank and five regional savings banks in Spain failed the body's key test of capital strength.

For the seven at-risk banks, it estimated the shortfall of capital at 3.5 billion euros.

Many analysts dismissed the tests as not rigorous enough.

Neil MacKinnon, an economist at VTB Capital in London, said in a note that it "looks like a whitewash and the initial reaction is one of scepticism on the part of the markets."

ING bank analyst Chris Turner said the CEBS announcement "does not appear to have uncovered any 'skeletons in the closet'," but added: "Whether it goes far enough remains to be seen."

The report spared all the banks examined in debt-laden Portugal. Greece, which sparked fears for the stability of the entire eurozone and was rescued by an EU and IMF bailout, also got off lightly with just one bank failing.

Another focus of concern in Europe, Ireland, saw its banks also pass the CEBS's key measure of so-called Tier One capital ratios, as did Italy. French and British banks likewise emerged with passing grades.

CEBS insisted the stress tests are "a substantial and severe test, both in macroeconomic terms and in financial terms," Vitor Constancio, vice-president of the European Central Bank and a CEBS member, told a news conference.

The head of the EU executive commission's financial affairs division Marco Bruti said: "We have always maintained that the bulk of the banking system in the EU is sound, and this is confirmed now by the stress tests."

The Tier One ratio measures core capital against outstanding assets, such as loans. A key test was the effect a government debt crisis would have on banks' balance sheets which hold large amounts of government bonds.

Banks must maintain a minimum ratio of 6.0 percent while a surplus reassures investors the bank is not likely to run suddenly short of cash. The CEBS calculated the seven banks would see this ratio fall below six percent.

The CEBS estimated by the standard of its test that the total potential damage to balance sheets at the 91 banks -- which account for 65 percent of the European banking market -- would be 566 billion euros (727 billion dollars) over two years if certain tough conditions hit.

The scale of this crash test is more than twice the amount injected into EU banks at the height of the financial crisis.

As a comparison, US crash tests in the first half of 2009 on 19 banks had found that 10 banks would need 75 billion dollars of extra capital.

"The competent 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 recapitalisation," the CEBS said.

Steps are already underway to restructure HRE and the Spanish regional banks and the Greek finance ministry said on Friday that it planned to help recapitalise ATEBank.

European governments were likely to move fast to support the banks that failed the tests and can expect to face redoubled problems in raising funds normally from financial markets.

Some banks are already being helped by exceptional measures by the European Central Bank, including the purchase of government bonds.

The tests were the first time such an insight into the secret entrails of leading banks has ever been published in Europe.

If markets judge the tests too weak, analysts have warned the result could be to undermine or even negate the exercise, which aimed to remove uncertainty.

If the criteria pass the market test, then doubts about the solvency of the European banking sector will be dispelled. Banks will step up lending among themselves and, more importantly, to businesses and the economy at large.

US stocks extended gains on Friday on the results and US quarterly earnings.

© 2010 AFP

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