EUROPE'S latest banking stress tests were last night facing ridicule after the review ordered banks to raise a paltry €2.5bn to fireproof themselves against a lengthy recession.
The cash must be raised by eight banks that failed the tests -- a failure rate far lower than market expectations that as many as 20 of the 91 banks surveyed would fail.
Another 16 banks passed by a narrow margin and will have to draw up plans to improve their finances, the European Banking Authority (EBA) announced last night. The IMF yesterday called on Europe to not only address problems in eight banks that failed a stress test but also those that narrowly passed.
"In light of the current turmoil, the fund would emphasise the importance of further strengthening capital buffers," the IMF said in a statement.
The high pass rate and low capital demand were widely criticised for falling far short of what's needed to restore confidence, but the European authorities last night insisted the exercise had been "robust" and useful. "It's really an unprecedented amount of information that we're putting out there," EBA chairman Andrea Enria told reporters in London. "We want market participants to be able to do their own calculations ...
"Anybody can see what state the European banks are in."
This year's results reveal for the first time the profit forecasts of the banks, a breakdown of their sovereign bond holdings, and their funding costs.
The eight banks that failed include five banks in Spain, two Greek lenders and one Austrian -- they must together raise €2.5bn by the end of the year.
The 16 near misses must engage with their national regulators on plans to up their capital and raise any funds by April 2012. The EBA last night declined to give a view on how much capital the 16 might need.
Twelve German lenders passed as state-owned Landesbank Hessen-Thueringen opted out, clashing with regulators over the type of capital that should be allowed. Meanwhile, Spain downplayed the fact that five Spanish lenders failed -- saying the result was due to EU criteria that ignored provisions the country's banks use as a cushion for hard times.
There was widespread criticism of the results by analysts. "Under a more realistic test, the actual capital shortfall is likely to be at least 10 times the official estimate of €2.5bn," said Jason Karaian, economist with the Economist Intelligence Unit.
Michael Symonds, credit analyst at Daiwa Capital Markets in London, said the fact that so few banks failed meant 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,"he added.
'Stressed' scenarios in the EBA stress test included a 0.5pc contraction in the eurozone economy this year and a 15pc fall in European equity markets. Those scenarios triggered €400bn of losses between 2011 and 2012 -- an annual loss rate as bad as 2009's catastrophic tally. Mr Enria yesterday insisted that the tests gave the banks "quite a harsh squeeze", but said the exercise was "not a forecast" and "doesn't give a clean bill of health to anybody".
Mr Enria also hit out at criticisms that the tests were considering "eurozone debt as risk free". "This is not true," he insisted. "The stress test is quite rigorous in the treatment of sovereign exposures." (Additional reporting, Bloomberg, Reuters)