Europe's banking health check has shown countries and lenders are implementing global capital rules at vastly different speeds, and 36 firms would have failed if new capital rules were fully applied.
The Eurozone lags behind countries outside the bloc in implementing the Basel III capital rules that are due to come into full force in 2019, potentially adding another challenge for the European Central Bank (ECB) when it takes over supervision of Eurozone lenders next month.
European stocks, low-rated government bonds and the Euro all rose yesterday morning as financial markets gave a cautious thumbs up to the results of the pan-European stress tests.
But by the end of the trading day, the optimism had faded as yet more bleak news from Europe's largest economy, Germany, weighed on investors.
Bank of Ireland, which along with AIB and Ulster Bank, passed the ECB's wide-ranging health check, closed down 2.2pc yesterday.
Permanent TSB, the only Irish bank to fail part of the comprehensive tests after a €854.8m shortfall was identified under the toughest scenario, pared losses after its stock dropped in the morning as much as 24pc. It closed down 3pc.
Carola Schuler, managing director for banking at Moody's, said that on a fully-loaded basis, many banks across Europe have only passed the stress tests by very thin margins
"They will be expected to do more," she said.
Some 25 European banks failed the health check of whether they could withstand a recession, and another 11 would have failed if the full Basel III rules had been applied.
The divergence was substantial across countries.
Capital ratios for Greek banks were on average 7.8 percentage points lower under full Basel rules, and the difference for Irish banks was almost 7 percentage points.
Ratios for Portuguese banks were 220 basis points lower on average and in Spain they were 100 bps lower.
On a full Basel III basis, five German banks, including HSH Nordbank and DZ Bank, would have failed, compared to just one - Muenchener Hypothekenbank - in the standard test.
But in Sweden, Denmark, Norway, Britain, Poland and Hungary there was almost no difference between the full Basel III rules and the transitional numbers, because national regulators have effectively fully implemented the rules already.
That could put pressure on more banks to improve the amount and quality of their capital, potentially impacting their profitability, growth plans and dividend payouts.
The Wall Street Journal:
"Will the stress tests pave the way for faster credit growth in the Eurozone? In the short term, some easing of credit conditions seems likely, on top of the modest recovery already under way. Banks that may have been hoarding capital and liquidity may now feel less constrained, particularly if the equity and bond markets react positively, thereby reducing the cost of capital."
The New York Times:
"Analysts predicted that financial markets would react with relief to the news that there were no unpleasant revelations about Europe's biggest banks. But some wondered whether the relatively sanguine results meant that the health exam was not tough enough, despite the central bank's promises that the assessments would be rigorous."
Similar to efforts in the US five years ago, the rigorous stress testing of banks in Europe is key to building a floor under the region's economy and thus providing the basis for a more durable recovery. But for the assessment to be fully effective, Europe needs to do more, including finish work on the four legs of successful economic integration.
The Financial Times:
"Italy's central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area's financial sector."