76.9% Of European Banks Pass the “Stress Test”

By: Dr. Mike Campbell

Or put another way seven out of 91 banks which were selected to undergo the stress tests were found wanting, as Shakespeare might have said, “As you like it”. The stress tests had been designed to convince investors that EU financial institutions were built on firm foundations and would be able to weather the fiscal storms of, say, a double dip recession and another “Greek style” sovereign debt crisis.

Inevitably, a test that was conceived to build confidence and reassure the international investment community was bound to come in for criticism and already, some analysts are claiming that the bar was set too low. On the other hand, most of the financial puss in the system has already been purged by the most brutal financial crisis since the Great Depression, so the banks still left standing should have put their houses in order.

Of the banks that didn’t pass muster; five were based in Spain (Diada, Espiga, Banca Civica, Unnim and Cajasur), one in Greece (ATEBank) and one, rather surprisingly, in the home of financial rectitude, Germany (Hypo Real Estate).

The Committee of European Banking Supervisors estimated that these banks needed a combined total of €3.5 billion of new capital in order for them all to pass the tests – in the greater scheme of things this is not a huge sum of money within the banking sector. The seven banks would have to discuss how they would address this problem with their respective supervising bodies over an (unspecified) given period of time, according to CEBS chairman, Giovanni Carosio.

The banks failed the test because their tier one capital ratios (the strictest determination of their capital) dipped below the 6% mark in the simulation. The acid test of confidence will be whether or not interbank lending rises.