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Twenty-four European banks fail financial stress tests

European banking regulators warned on Sunday that 24 banks in the European Union had a 25bn (19.6bn) capital hole after being tested over their financial strength.

The outcome puts the focus on Italian banks, nine of which were found to have a total shortfall of 9.4bn, the largest of which was at Banca Monte del Pashi di Siena. In Greece, three banks failed the stress tests, with the same number failing in Cyprus.

The European Banking Authority (EBA) also found that a number of banks were close to failing the tests, which examined whether they had enough capital to withstand a series of economic shocks, such as a rise in unemployment and declining economic growth. UK banks passed the tests but Ireland's Permanent TSB failed.

The banks being tested had combined assets of 28tn - 70% of assets in the EU. Twenty-six of them, including the Royal Bank of Scotland and Lloyds Banking Group, had their restructuring plans approved before the tests started.

The banks now have two weeks to tell the European Central Bank how they intend to plug the gaps in their balance sheets. Their financial strength was tested at the end of 2013, along with their likely position at the end of 2016 after being subjected to market and economic shocks.

While there is an urgent need for banks to make up for the shortfalls, as many as 40 banks would need to find ways to raise capital to meet a higher threshold that will be imposed in four years' time.

Lawyers at Linklaters calculated that banks had been raising more capital before the stress tests than they did before the previous tests held in 2011, when eight banks out of 90 failed and 16 banks almost failed.

Since then the methodology has been tightened and has also been linked to a review of the quality of their assets - known as the asset quality review, the outcome of which is being published on Sunday by the ECB.

An additional bank - Liberbank of Spain - failed the ECB tests but passed the EBA exam, which measures capital ratios at year-end periods.

The EBA said 54bn of extra capital has been raised in the nine months from the end of December 2013, when the tests were imposed on the banks, while others had already embarked on efforts to bolster their capital.

This reduced the number of failed banks to 14, with an urgent need to raise 9.5bn.

The three Greek banks put plans to restructure themselves to the ECB after the start of the test period. They accounted for 9bn of the total shortfall. However, only one of them - Eurobank Ergasias - would have failed had these restructuring plans been taken into account.

The stress tests found that banks' capital strength would be hit hardest by debts caused by credit losses, which would wipe 500tn off their balance sheets - an amount equivalent to the size of Belgium's GDP.

The banks had to meet a capital threshold of 5.5% and the average for banks after the test was 8.4%.

Forty banks would not meet a 7% threshold being used by international standard setters from 2018.

[Source: By Jill Treanor, The Guardian, London, 26Oct14]

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small logoThis document has been published on 27Oct14 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.