July 16th, 2011
Econintersect: The latest stress tests of 90 European banks revealed that 8 would fail under adverse conditions and another 16 would barely survive. Actually, 9 banks failed because Helaba, a German bank, withdrew from the process rather than accept a failing grade. That means that 25 of 91 banks (27.5%) are at risk in the event of a financial shock. The stress tests may not have been sufficient, however, because they did not include the possibility of sovereign debt defaults. These are now considered real possibilities by some.
Follow up:The results of the stress tests showed that the highest risks were found in the periphery countries and that the total capital position for all 90 banks netted to a slight capital shortfall. From an article by Augustino Fontevecchia in Forbes:
This latest round of stress tests was conducted by the European Banking Authority (EBA), which surveyed 90 banks in 21 countries. The results showed that despite much warning and continuing crisis in the Eurozone, 5 Spanish banks, 2 Greek banks, and 1 Austrian bank continue to hold less than 5% CT1 capital ratios. One of the Greek banks was in such bad shape that it actually held less than 2% CT1, according to the report.
Europe-wide capital shortfall was €2.5 billion. Another 16 banks barely passed the test, with CT1 capital rations in the 5% to 6% range. Of these, seven were Spanish and 2 were Greek, with the two peripherals showing some of the weakest banking sectors in Europe.
For the whole 90-bank sample, average CT1 ratio stood at 7.7% under stress conditions, down from 8.9% toward the end of 2010, when the last round of tests were conducted. According to the EBA, banks raised about €50 billion between January and April, minimizing the capital shortfall from a whopping €26.8 billion.
Investors and traders have reacted negatively to the stress test results. Stock indexes in New York and Europe were mostly down for the week, influenced by European and U.S. debt situations, in spite of generally good quarterly earnings reports. From Reuters:
Investors remain deeply concerned by Europe's inability to find a broader solution to a debt crisis that could eventually lead to a series of sovereign defaults and have wide-ranging implications for public finances and banks worldwide.
"There's a general sense of nervousness prevailing because of the stress tests," said Boris Schlossberg, director of FX research at GFT in New York.