Tuesday 6 December 2016

Credibility crisis as just seven fail bank stress test

Robert Lea and Miles Costello

Published 24/07/2010 | 05:00

Bank of Spain Governor Miguel Angel Fernandez Ordonez during a news conference in Madrid yesterday
Bank of Spain Governor Miguel Angel Fernandez Ordonez during a news conference in Madrid yesterday

The credibility of Europe's unprecedented stress-testing was thrown into doubt last night after only seven tiny banks failed the examination.

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Seven of 91 European Union banks subject to stress tests failed with a combined capital shortfall of €3.5bn.

Analysts had been braced for significant failures and potential new funding of up to €60bn, which could have sent the markets reeling. Instead, regulators said the seven that failed would need only €3.5bn to shore up their balance sheets.

The Committee of European Banking Supervisors, which carried out the tests, even delayed the results until the European markets had closed. Equity markets in New York actually rose after the announcements.

In Germany, Hypo Real Estate, a property lender that was taken over by the state, was the only bank to fail.

Agricultural Bank of Greece, which is 77pc owned by the Greek state, failed after it reported a shortfall of €242.6m and five Spanish savings banks also failed to have sufficient reserves to maintain a Tier 1 capital ratio of at least 6pc in the event of a sovereign-debt crisis.

"It would have aided credibility if there had been a higher number of fails and a higher amount of capital raised," said Jon Peace, a London-based analyst. "People will be surprised that it is as small as that."

Compromise

Analyst Mark O'Sullivan said: "What seems to have occurred is a compromise among European banking regulators, with many questioning if the bar had been set way too low in testing the European banking sector."

While seven failed the stress tests, a further 38 institutions are currently relying on continued state support, worth a combined €170bn.

Significantly, the stress tests occured after sizeable capital raisings, with European banks ending 2009 with a Tier 1 ratio of 9.9pc versus 8.2pc in 2008.

The stress tests were designed to find out whether the banks have sufficient strength -- known as Tier 1 capital, a bank's core funding and assets that should enable it to meets its commitments and pay its debts.

The stress tests were designed to see whether banks could withstand the worst of future severe downturns.

But the evaluations took into account potential losses only on government bonds that the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests ignored the majority of banks' holdings of sovereign debt, analysts said.

Spain, with 27 tested banks, made up the biggest portion of those taking the exams. The largest bank, Banco Santander SA, passed with a Tier 1 capital ratio of 10pc under the most stringent scenario.

Regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1pc on Greek debt, 12.8pc on Irish bonds, 12.3pc on Spanish bonds, 14pc on Portuguese bonds and 4.7pc on German state debt, according to CEBS. (Additional reporting by Bloomberg)

Irish Independent

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