Bank stress tests prove strength, says EU

Friday, July 23, 2010

LONDON/BRUSSELS/MADRID - European Union “stress tests” on the bloc’s banks prove that the EU financial sector is sound because just seven out of 91 lenders - five of them Spanish - failed, officials said Friday.

The stress tests analysed whether banks could survive a further economic or sovereign-debt crisis. EU leaders insisted the results be made public in a bid to dispel market fears that the European banking system as a whole would need government rescues.

The US ran and published similar tests last year.

The results “confirm the overall resilience of the EU banking system … and are an important step forward in restoring market confidence,” the Committee of European Banking Supervisors (CEBS), European Central Bank (ECB) and European Commission (EC) said.

According to CEBS, the London-based body which oversaw the tests, seven banks out of the 91 analysed would not have been able to keep the proportion of their top-rated “Tier 1″ capital above 6 percent of the value of their liabilities if the EU economy went back into recession and the value of government bonds plummeted.

The seven are ATE of Greece; Hypo Real Estate (HRE) of Germany; and Spanish bank Cajasur and banking groups Civica, Diada, Espiga and UNNIM, CEBS said in a statement issued after European markets closed.

The 6-percent threshold is the hypothetical limit below which supervisors calculated that a bank would be unable to cover all its liabilities. The legal minimum ratio is 4 percent.

The banks which failed the test “should take the necessary steps to reinforce their capital positions” by raising money on the markets or from government rescue funds, a joint CEBS-ECB-EC statement said.

According to CEBS calculations, HRE would have to raise 1.245 billion euros ($1.6 billion) extra to reach the 6-percent threshold, while ATE would have to raise 242.6 million euros.

Of the five Spanish banks, Diada would need 1.032 billion euros, Espiga 127 million, Banca Civica 406 million, UNNIM 270 million and Cajasur 208 million - a grand total of 2.043 billion euros.

Earlier Friday, the commission, the EU executive, approved a revised Spanish bank rescue plan which would allow the government to bail out individual lenders.

Bank of Spain governor Miguel Angel Fernandez Ordonez insisted that Spain was not in fact worse off than the rest of the EU, saying that national test results could not be compared because only Spain had submitted information on all its banks.

Spain’s regional savings banks have been weakened by the collapse of the housing sector, after having lent heavily to construction companies. A current official restructuring plan aims at reducing their number from 45 to about 20.

Meanwhile, ATE said in a statement that it had “discussed in detail the stress test with Greece’s central bank … (and) will proceed to a capital increase to cover future capital needs.”

HRE took a tougher line, saying that the results were only of “limited meaning” because they did not take into account the planned transfer of 210 billion euros’ worth of devalued “toxic” assets to a state rescue fund later in the year.

HRE had asked for 10 billion euros in aid from the state rescue fund, SoFFin, but only been granted 7.87 billion euros, it said.

“With full recapitalization (by SoFFin), HRE would have exceeded a Tier 1 capital ratio of 6 percent in all scenarios in the current tests,” the statement said.

Officials took a similar line, with the head of the financial services supervisory authority, Jochen Sanio, arguing that apart from HRE, German banks were “robust and resistant.”

Before the results were published, analysts warned that the tests would not be stringent enough, as they did not take into account the danger of a sovereign default in a euro state such as Greece.

But Vitor Constancio, deputy head of the ECB, said that a fiscal safety net set up by the EU this spring “leads to the conviction that, on the basis of these measures, there will be no default … so it would have been totally contradictory” to test for one.

Moreover, there is only a 5-percent chance that the economic slump foreseen in the tests will materialise, making the exercise “very severe,” he said.

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