Politeía Digest

Quis custodiet ipsos custodes?

8 Banks Fail EU ‘Stress Tests’

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By David Enrich

LONDON—Eight banks flunked the European Union’s “stress tests,” with a combined shortfall of €2.5 billion ($3.54 billion) in capital under a simulated worst-case economic scenario, the European Banking Authority said.

The EU regulator said Friday that another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system.

By awarding a relatively clean bill of health to the vast majority of Europe’s banking industry, the tests are likely to be greeted with skepticism. Analysts and investors were bracing for as many as 20 banks to fail and to need to raise tens of billions of euros of new capital.

Last year’s tests, widely discredited for being overly lax and inconsistently enforced, saw seven lenders fail, with a combined capital deficit of €3.5 billion.

The new tests, under way since March, represent policy makers’ latest bid to douse the Continent’s financial crisis. The goal is to alleviate fears among investors, analysts, regulators and some bankers that lenders are sitting on huge undisclosed piles of risky loans and securities that could drag down the banking system and entire economies.

The 2011 tests examined the abilities of banks from 21 countries to endure two years of rising unemployment, falling house prices and other adverse conditions that regulators regard as worst-case scenarios. Banks whose capital buffers would fall short of 5% of their risk-adjusted assets under the test will be required by the end of the year to raise new funds through selling stock or shedding business lines or assets. Those that can’t will have to turn to their national governments for help.

Spain, whose economy and banking system are reeling from a collapsed real-estate market, is home to the largest number of failures, with five banks dipping beneath the 5% threshold, the EBA said. Another seven Spanish lenders barely passed, with capital ratios between 5% and 6%.

Two Greek banks and one Austrian bank also failed the tests, the EBA said. In addition to Spain, the countries with banks that nearly failed are Cyprus (one bank), Germany (two), Greece (two), Italy (one), Portugal (two) and Slovenia (one).

In Ireland, which had to accept an international rescue last fall after its banking system imploded, all three of the tested banks easily passed the tests.

The small number of failing grades reflects the fact that banks over the past year have scrambled to raise new funds in anticipation of the tests. The EBA said Friday that banks involved in the tests raised roughly €60 billion in the first four months of 2011. If the tests had been conducted based on banks’ Dec. 31, 2010, financial positions, 20 lenders would have failed with a total €26.8 billion capital shortfall, the EBA said.Read More in the Wall Street Journal

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Written by Theophyle

July 15, 2011 at 7:20 pm

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