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Eight banks fail European stress tests

Eight European banks failed stress tests Friday, showing that they would be unable to withstand a prolonged recession, the European Banking Authority said on Friday. 16 further banks barely passed, according to Europe’s banking regulator.

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AP - Eight of 90 banks have flunked stress tests that project how they would fare in another recession, and 16 more barely passed, Europe’s banking regulator said Friday.

The failing banks should “promptly” take steps to strengthen their financial cushions against losses, the European Banking Authority said as it released the results. The failing banks were in total €2.5 billion ($3.5 billion) short of the capital they needed to pass.

 
Two were from Greece, five from Spain and one from Austria.
 
The banks that barely passed may also face pressure to strengthen their finances along with the ones that failed.
 
The EBA lacks the power, however, to force banks to raise more capital - whether from investors or governments – or to make them merge or sell businesses. Only their national governments can do that.
 
The tests are a key element in fighting Europe’s debt crisis. Officials want to identify weak banks and make them strengthen their finances so they could survive a possible default on government bonds by Greece or another heavily indebted country.
 
The test, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts. For the 17-country eurozone, that would be a drop of 0.5 percent this year and 0.2 percent next year.
 
Some said the tests were not tough enough because they did not include a scenario in which Greece defaults on its government bonds. That is considered a key risk for Europe’s economy.
 
The banks were required to maintain a financial pad of at least 5 percent of their loans, investments and other assets. The financial pad – dubbed Core Tier 1 capital – stands ready to absorb unexpected losses and is therefore a key measure of a bank’s stability.
 
One bank, Germany’s Helaba, pulled out of the tests in a dispute with the EBA over whether large part of the bank’s capital in the form of non-voting holdings by government would count.

 

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