Seven banks fail to make the stress test grade

BRUSSELS - Seven European banks have failed the region's stress tests, designed to assess their ability to withstand a series of worst-case scenarios such as another recession.

EU policymakers will now be hoping that the news brings an end investor doubts in the sector, after Friday evening's (23 July) publication of the test results showed the vast majority of banks to have passed with flying colours.

"We support ... the transparency of this exercise, given the specific market circumstances under which banks currently operate," the Committee of European Banking Supervisors (CEBS), the European Central Bank (ECB) and the European Commission said in a joint statement.

One German bank (Hypo Real Estate), five Spanish lenders (Unnim, Cajasur, Diada, Espiga, Banca Civica), and one Greek bank (ATEbank) failed the test.

Banks whose Tier 1 capital ratio, the main buffer used to protect against losses, fell below six percent were deemed to have failed, although authorities stressed that four percent is the current regulatory minimum.

The results are broadly in line with market expectations, with most analysts predicting failures in the five to 10 range. The seven firms will now need to raise roughly €3.5 billion in additional capital between them.

"Where the results of the exercise indicate that individual banks require additional capital, these banks should take the necessary steps to reinforce their capital positions through private-sector means and by resorting, if necessary, to facilities set up by member state governments," said the CEBS, ECB, commission statement.

None of Europe's major banks failed the tests which were conducted by CEBS on 91 firms in order to asses their ability to deal with another recession or losses on eurozone sovereign bonds.

A 'haircut' of 23.1 percent was applied to Greek debt, slightly higher than the 17 percent that had earlier been predicted. Spanish bonds were marked down by 12.3 percent, and German bonds by 4.7 percent.

Doubts remain

Doubts remain however, with some analysts prior to Friday's publication saying a 50 percent markdown on Greek bonds would be more appropriate.

"I see nothing stressful about this test. It's like sending the banks away for a weekend of R&R," said Stephen Pope, chief global equity strategist at Cantor, reported various media.

Other analysts were critical of the fact that sovereign debt haircuts were only applied to bonds set aside for trading, and not those being held until maturity.

Stock markets in the US fluctuated as investors digested the news. Europe's markets were all closed when data were released.

Centre-right MEP Jean-Paul Gauzès, a key-player in European efforts to overhaul its finance sector, welcomed the results, but cautioned that legislative reform must continue.

"These good results should not bring us to disregard the implementation of norms, in particular as regards banks' own capital requirements," he said.