LONDON, July 15, (Agencies): Eight European banks have failed a test of their ability to withstand a prolonged recession which did not build in the impact of a Greek default, the European Banking Authority said on Friday.
The watchdog’s “stress test”, which made 90 lenders reveal for the first time their profit forecasts, a breakdown of their sovereign bond holdings and funding costs, showed the failed banks would need 2.5 billion euros ($3.5 billion) in fresh capital, way below what most analysts had expected.
Five banks in Spain, two in Greece and one in Austria flunked the test. Expectations were for five to 15 banks to fall short and need to raise 10 billion euros or more in capital.
The euro hit a session high versus the dollar and safe-haven U.S. Treasury bonds pared gains in response.
“With only eight banks failing and the requirement for these banks to raise 2.5 billion in capital, it wasn’t the solution to restore confidence. What was needed was for more banks to fail and for more capital to ultimately be raised,” said Michael Symonds, credit analyst at Daiwa Capital Markets in London.
Banks were deemed to have failed if they slid below a 5 percent core capital pass mark in the face of a theoretical slide in stock, bond and property prices during a two-year recession.

Action
A further 16 banks passed the 5 percent mark by less than one percentage point and will also have to take action.
“The EBA has also recommended that national supervisory authorities request all banks whose core Tier 1 ratio is above but close to 5 percent, and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position,” it said in a statement.
Failed banks must now produce firm plans by September to plug capital shortfalls by the year-end, with their home government ready to step in with taxpayers’ money if needed. Lenders that scrape through the test will also be expected to shore up their capital buffers.
Critics say the health check failed to reflect market expectations that Greece will default on its debt in some form, which would pile up losses for German and French banks that hold large amounts of the country’s debt.

The EBA did not force banks to explicitly haircut sovereign bonds held in their long-term banking book, but told them to include the estimated hit of potential losses from holdings based on a theoretical four notch credit rating downgrade, which would mean a low rate country like Greece had defaulted.
Under the test, banks would take a 15 percent “haircut” on Greek bond holdings, while most market experts expect to see up to half the value of those bonds wiped out at some point.
Fears the Greek crisis will spread to Spain and Italy have caused a jump in borrowing costs for those countries and their banks, prompting concern lenders are not resilient enough to cope with potential losses if the crisis deepens. European banking shares have slid to two-year lows as a result.
This is the third and toughest test of lenders in the European Union since the global financial crisis, which began four years ago — last year’s gave Irish banks a clean bill of health shortly before they collapsed into state control.
Some banks moved to bolster capital ahead of the results, though it is too late to affect them.
Austria’s Volksbanken, which failed the test, sold its eastern European arm VBI to Russia’s Sberbank on Thursday.
Greece’s EFG Eurobank said it was in talks to sell a majority stake in its Turkish unit Eurobank Tekfen, and Greek peer Piraeus said it was trying to sell its Egyptian business to Standard Chartered.
Greek banks are under severe pressure to strengthen their capital to cope with the economic crisis at home.
Greece’s number two bank EFG Eurobank pledged on Friday to boost its capital after failing EU-wide bank stress tests, as did struggling ATEBank.

“Eurobank EFG...fully acknowledges the outcomes of this exercise,” the bank said in a statement after falling 58 million euros ($82 million) short of the minimum capital ratio benchmark.
“Eurobank EFG has already decided, announced and is implementing capital enhancing actions, for which the Bank of Greece has been informed,” it said.
ATEBank said it would proceed with a bond issue worth about 235 million euros by the end of 2012.
The Bank of Greece said that Eurobank recorded a core Tier One capital ratio of 4.9 percent, just below the demanded threshold of 5.0 percent, while ATEBank flunked with minus 0.8 percent.
But Eurobank, which posted a net profit of 74 million euros in the first quarter of 2011 from 16 million euros a year earlier, insisted that the result “is not a forecast of profitability.”
The lender had seen the writing on the wall and was trying to muster its reserves.
In February it sold a majority stake in Polish subsidiary Polbank to Raiffeisen Bank, and on Thursday said it was “reviewing strategic options in Turkey” and “having preliminary discussions on a transaction involving a controlling stake in its local subsidiary, Eurobank Tekfen.”
The Bank of Greece said these measures, either taken or planned, would lead Eurobank to a core one tier ratio of 7.6 percent by the end of 2012.
Bank of Greece governor George Provopoulos said in a statement: “The results of the exercise are encouraging as regards the capital standing of our banks, which, following urgings also by the Bank of Greece, carried out capital increases and took business actions to reinforce their position, despite a difficult environment.”

The remaining Greek banks tested in the exercise were National Bank, Alpha Bank, Hellenic Postbank and Piraeus Bank.
ATEBank is among assets to be privatised by the Greek state as it struggles to reduce its monster debt of over 350 billion euros. The government has announced plans to sell 26.2 percent in ATEBank, in which it controls 89.9 percent, by the first quarter of 2012.
It also intends to sell its full 34-percent stake in Hellenic Postbank by the end of this year.
Meanwhile, one German bank of 13 tested has failed the European Union bank stress tests, but state-owned regional bank Helaba contested the methodology used and released its own results.
Helaba was the only bank missing from a list of 12 that the German central bank and financial market regulator BaFin said had passed.
“Under the EBA conditions the bank failed, that is clear,” Helaba spokesman Wolfgang Kuss told AFP, before adding: “From our point of view we were successful.”
He stressed that the bank had published its results on its website using the standard European Banking Authority (EBA) template and showing the results using the authority’s method, which it contests, and the bank’s own calculation.

The former showed a core equity ratio of 3.9 percent, but “6.8 percent is our figure including silent participations,” Kuss said.
He also stressed that “we are not against the stress tests. We oppose the method, the special capital definition of the EBA.”
Helaba, which weathered the global financial crisis without additional public aid, thus claimed that it meets criteria for core capital of at least 5.0 percent.
The bank said on Wednesday that the EBA, which is running the tests, did not consider changes to so-called hybrid capital agreed to by regional authorities.
Helaba thus insisted on publishing its own results, which showed it had core tier 1 capital of 6.8 percent, well above the required threshold.
That included 1.92 billion euros ($2.72 billion) that is the result of a silent participation by the region, which means it does not have voting rights normally associated with such a stake.
German officials backed Helaba in its dispute with the London-based EBA.
“I understand my colleagues (at Helaba) because the EBA did not do itself proud in my opinion,” the head of the BdB private bank federation, Michael Kemmer, told Deutschlandfunk radio on Friday.
Helaba says it notified the EBA of changes it had made to conform to the authority’s criteria, but was told at the last minute that the EBA did not have time to study the response.
The German national bank also said that Helaba was “sufficiently capitalised” in its view.
Hesse, a western German state that is home to the German financial capital Frankfurt, said it had committed in late April to amending the silent participations so they would conform to EBA criteria.

Nervous
This time, banking regulators have been trying to walk the fine line between being tough enough to be believable and not rattling nervous markets with more bad news.
Banks must show they can maintain adequate resources to absorb unexpected losses even during an adverse scenario in which growth falls 4 percentage points short of European Union estimates in 2011 and 2012. That comes out to a fall in gross domestic product for the 17-member eurozone of 0.5 and 0.2 percent.
The gloom-and-doom scenario also includes a fall in real estate, stocks and the US dollar.
One key new measure will be detailed information on how much each bank holds of shaky government bonds from Greece, Portugal and Ireland — by country, amount and bond. All three countries are currently depending on bailout loans from the European Union and the International Monetary Fund and cannot borrow normally, raising the question of how they are going to roll over their debt in coming years.
The big question, analysts say, is whether governments and banks act on the results by taking painful steps such as raising capital. Asking private investors for more money can dilute shareholdings, and therefore can weigh on stock prices; banks that can’t get new capital from markets may have to turn to governments.
“What we would hope is that governments come forward with clear plans to aid failing banks, or banks that are nearly failing, and so far we haven’t heard much about that,” said Marie Diron, senior economic advisor for Ernst & Young.