LONDON/MADRID, July 23, (Agencies): Seven European banks would not be strong enough to withstand another recession and would face a capital shortfall of 3.5 billion euros ($4.5 billion), tests run in an attempt to revive investor confidence showed on Friday.
Five of Spain’s smaller regional lenders, known as cajas, failed the test and their recapitalisation is likely to speed a restructuring of the troubled sector.
Banks in Germany and Greece were also seen as weak spots and in need of restructuring, but state-owned Hypo Real Estate was the only German lender to flunk and state-controlled ATEbank was the only Greek bank to fail.
Analysts had expected five to 10 banks to fail the test. As expected, no big banks failed the health check.
German government bond futures hit one-month lows and the euro briefly pared its losses against the dollar after the results were released.
Europe tested how 91 banks would cope with another recession and losses on government debt after the Greek crisis hit markets and raised fears the euro zone could unravel.
It aimed to repeat a health check on US banks last year that helped restore investor confidence and underpinned a recovery by bank shares.
The Committee of European Bank Supervisors said its test was more severe than the US health check of its banks. The adverse scenario in Europe was a one in 20 years possibility, compared to a one in 7 years probability in the US test, it said.
But markets have had their doubts.
“I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R,” said Stephen Pope, chief global equity strategist at Cantor.
Under the most severe scenario banks were tested on how they would cope with a moderate recession this year and next, with additional losses on government bonds.
Any bank whose Tier 1 capital ratio falls below 6 percent by the end of 2011 failed the test, and would be expected to raise funds to make up the capital shortfall.
Of most concern to investors was that government bond losses were only applied to trading books, and not hold to maturity bonds, as the test did not consider there was a risk of any sovereign default.
Banks’ holdings of government bonds were subjected to a 23.1 percent loss on their Greek debt, a 12.3 percent loss on Spanish bonds and a 4.7 percent loss on German debt, all based on 5-year bonds and their value at the end of 2009.
The hunt for weak spots in European banking has focused on Spain’s regional savings banks, as well as regional German lenders, known as landesbanks.
Spain and Germany have set up funds to help weak banks recapitalise and Spain wants more cajas to merge.
With the latest data showing signs of a strengthening recovery in Europe, banks could find themselves in a healthier position than expected.
A stress test on US banks early last year helped draw a line under worries about the sector there. European regulators were aiming to achieve the same.
But there have been clear splits in the 27-nation EU about how to model the test and how much to divulge, stoking worries that it will be less credible.
Hailed
The European Central Bank on Friday hailed the results of European Union stress tests on major commercial banks, saying the findings confirmed banks could survive severe shocks.
The ECB “welcomes the publication of the results” of tests on 91 banks, which “confirms the resilience of EU and euro area banking systems to major economic and financial shocks,” a statement said.
Only seven banks, five in Spain and one each in Germany and Greece, failed the exam.
The London-based Committee of European Banking Supervisors (CEBS) released the results of tests conducted in close cooperation with national supervisory authorities and the ECB to reassure investors that European banks stood on firm financial footing.
The ECB said the test process “significantly enhances the transparency of the EU and euro area banking sectors” and stressed it was carried out after European banks had had a chance to raise new capital, which helped them pass.
The stress tests assumed two adverse scenarios, one involving a severe economic recession and another that added a major shock to interest rates along with heavy losses on loans and government bonds.
Economists had warned that if the tests were deemed too lenient it could increase tension on crucial interbank lending markets.
But ING analysts said following the release that the “CEBS appears to have delivered reasonably rigorous methodology in an attempt to instil confidence.”
“What can be said is that today’s stress test release does not appear to have uncovered any skeletons in the closet’,” they added.
Passed
British banks Barclays, HSBC, Lloyds and RBS have passed European stress tests to see if they would cope with worsening economic conditions, the Financial Services Authority regulator said on Friday.
“The FSA welcomes the publication of the results of the EU-wide stress test exercise conducted by the Committee of European Banking Supervisors,” the FSA said in a statement.
“The CEBS exercise shows that the UK banks are well placed to handle further periods of economic stress, as outlined in the macro economic parameters detailed by CEBS, should such stress develop.”
Barclays, HSBC, Lloyds and Royal Bank of Scotland were the only British lenders that were assessed as part of the so-called “stress tests” on 91 different European financial institutions.
France
All four major French banks examined in the EU’s banking stress tests passed with a clean bill of health, according to results released Friday by European bank regulators.
BNP Paribas, Societe Generale, Credit Agricole and BPCE passed the financial stability tests for lenders “with success,” said the governor of the Bank of France, Christian Noyer.
French banks “really have a strong capacity for resistance,” Noyer said.
The four lenders were among 91 European banks examined by EU authorities to determine their ability to resist another financial crisis.
Finance Minister Christine Lagarde hailed the performance of the French banks, saying they reflected the “overall solidity” of the sector.
She said French banks had managed to avoid undue exposure to sovereign risk as they hold few bonds issued by governments in financial difficulty.
BNP Paribas holds Greek bonds worth 4.7 billion euros (6.1 billion dollars), Societe Generale 4.0 billion, BPCE 1.18 billion and Credit Agricole 854 million.
The London-based Committee of European Banking Supervisors said only seven of the 91 Europeam banks examined — five in Spain and one each in Germany and Greece — were deemed to be vulnerable to future financial upheavals.
Nordic
The banks in Sweden, Finland and Denmark examined in the European Union’s banking stress tests passed with a clean bill of health, Swedish, Danish and Finnish financial authorities said on Friday.
Sweden’s Nordea, SEB, Handelsbanken and Swedbank, along with Denmark’s Danske Bank, Jyske Bank and Sydbank and Finland’s OP Pohjola all passed the stress test in which 91 European banks were examined by EU authorities to test their ability to resist another financial crisis.
The Swedish Financial Supervisory Authority (FI) said in a statement the Swedish banks had passed the test “with a comfortable margin.”
“According to FI, the major banks have enough capital to weather even more severe scenarios that what was assumed in this stress test,” the Swedish authority said, adding the test did not change its previous assessement on the banks.
The Danish Financial Supervisory Authority also said the test did not “change the perception of financial stability in Denmark, and hence no new initiatives are called for.”
Finland’s Financial Supervisory Authority meanwhile said the test “confirmed the good health of the Finnish banking sector,” and that the results did “not warrant any special measures for ensuring the stability of the banking sector in Finland.”
The London-based Committee of European Banking Supervisors (CEBS) on Friday released results of tests conducted in cooperation with national supervisory authorities and the European Central Bank to reassure investors that European banks stood on firm financial footing.
Hypo Real Estate in Germany, five regional lenders in Spain and a bank in Greece failed the test.
Italy
All five major Italian banks subjected to EU banking stress tests showed capital reserves above the level needed to resist severe financial shocks, the banks announced separately on Friday.
Italy’s two biggest banks, Unicredit and Intesa San Paolo, weathered the tests best, boasting respectively at 7.8 percent and an 8.2 percent “tier one ratio” of capital after the cumulative effects of several adverse scenarios.
Banco Popolare followed with a ratio of 7.0 percent, UBI with 6.8 percent and Monte dei Paschi di Siena with 6.2 ratio, all above the EU threshold ratio of 6.0 percent.
“The results of the stress tests show that Italian banks are solid and prepared to face the future,” the head of the Italian banking association ABI, Giuseppe Mussari said in a statement.
“The sector is in excellent health and exhibits a high level of resistance to exceptional shock (confirming) the trust that families and businesses have always placed in the credit sector,” he said.
The Australian bank Macquarie recently cited Banco Popolare as one of the banks that might be unable to resist severe shocks.
Italian banks did better than most of their peers during the financial crisis thanks to robust retail operations and limited exposure abroad, and none received state capital injections.
The tests involved a total of 91 banks in the 16-nation eurozone plus Britain, Denmark, Hungary, Poland and Sweden to determine whether they have sufficient capital to withstand shocks such as those that caused the collapse of US investment giant Lehman Brothers in 2008.
Slovenia
Slovenia’s largest bank Nova Ljubljanska Banka (NLB) just passed the EU’s banking stress tests that showed it needs to strengthen its capital base, NLB said in a statement on Friday.
“Even though the resulting Tier 1 capital ratios are (6.3 percent) not below the 6,o percvent threshold, the stress test indicates the need for strengthening the capital base of NLB,” Slovenia’s only bank taking part in the test said in the statement.
The statement added NLB’s supervisory and management boards agreed earlier this week to call in September a shareholders’ meeting to decide on a 400 million euro capital increase that would ensure the bank’s capital soundness.
Slovenia’s state is the largest owner of NLB, holding a 43 percent stake in the bank, followed by Belgian banking group KBC, that owns a 30,6 percent.