By: Dr. Mike Campbell

The European Banking Authority (EBA) has released the results of a second round of banking stress tests which are designed to verify if Europe’s banks could withstand a further major economic calamity. The good news was that the bulk of the 90 banks which were tested came through the examination with a clean bill of health. On the other hand, 9% of the banks failed the test (8/90), with a further bank withdrawing from the test which pushes the failure rate to 10%. More worrying is that EBA identified a further 16 banks which were in the “danger zone”, meaning that almost one bank in three would struggle or sink in the event of another major financial crisis.

It is to be fervently hoped that another major financial earthquake is not just around the corner, but the aftershocks of an American default on its debt would be difficult to predict. Unless US politicians can set aside their differences soon, a default would happen early next month if the US borrowing ceiling is not raised. A Greek default has probably been priced into the system by most players, but it is unlikely that the European Union or IMF would stand idly by and let it happen.

The EBA have urged national banking authorities to ensure that any bank failing the test or being in the danger zone to ensure that the banks increase their liquidity. The banks to fail were in Spain (5); Greece (2) and Austria (1) with a German bank withdrawing.

The Governor of the Bank of Spain said that he did not believe that a further injection of capital was needed by the Spanish banks since the sector was already in the middle of a major restructuring.