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15 Jul 2011

Eight European banks fail stress tests

Eight out of 90 banks in Europe have failed stress tests designed to ensure they can get through difficult economic times. Channel 4 News’ Faisal Islam says we should not write off the tests just yet.

Eight out of 90 banks in Europe have failed stress tests designed to ensure they have sufficient capital to deal with difficult economic developments (Reuters)

The stress tests are designed to publicly identify weak banks so national regulators can push them to strengthen their finances.

All five UK banks passed according to the European Banking Authority (EBA) but five Spanish banks, two Greek and one Austrian failed.

Regulators hope the tests will persuade investors that the EU is coming clean about the extent of its banks’ problems.

The EBA analysed some 3,000 pieces of information – as opposed to 149 in 2010 – including how many bonds each bank holds from the financially troubled governments of Greece, Portugal and Ireland.

The eight banks which failed held a level of core tier one capital – a measure of a bank’s financial strength – below the 5 per cent required to pass the test. The combined shortfall was 2.5bn euros (£2.2bn).

Channel 4 News' Economics Editor Faisal Islam says the stress tests contain a treasure trove of information:

"So why were the stress tests conducted by the EU's new European Banking Authority widely written off even before they were published? 

"Irish banks that passed these tests a year ago, were within weeks heading for such a profound level of bankruptcy that they threatened to take the Irish state with them."

Read more: Don't write off banking stress tests just yet

The EBA has also issued its first formal recommendation that individual authorities should require banks whose tier one capital fell below the 5 per cent threshold to promptly fix this shortfall.

Barclays held 7.3 per cent tier one capital, HSBC held 8.5 per cent, Lloyds Banking Group held 7.7 per cent and Royal Bank of Scotland held 6.3 per cent. A figure for Standard Chartered was not available.

The EBA added that another 16 banks only just passed the tests.

Jason Karaian, economist with The Economist Intelligence Unit, said: “The stress tests’ headline result was underwhelming, but the pressure brought to bear by the markets next week should sharpen the minds of policymakers. Harsh medicine is needed.

“The sooner that officials swallow hard and take decisive, painful measures to draw a line under the crisis, the quicker that Europe’s sickly financial system can begin to nurse itself back to health.”

A spokesman for the British Bankers’ Association said: “The UK’s banks took early action to rebuild their capital base following the global financial crisis, and are recognised by international authorities for their work to strengthen their capital positions.

“Today’s report from the European Banking Authority provides further information on strengths and weaknesses in the European banking system. This is a significant piece of work, which should now be subjected to careful and considered analysis.”

More on Europe’s debt crisis

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