Seven of 91 EU banks fail in stress tests

By not including the sovereign debt that the banks hold, are the EU stress tests credible?

Manu Fernandez/AP
People walk by Caixa Catalunya branch in Barcelona, Spain, Friday. Caixa Catalunya is one of the seven of the 91 European Union banks that failed stress tests aimed at measuring their financial strength. The credibility of the tests has been called into question.

The European Union bank stress test, which included 91 banks or about 65 percent of the EU banking sector, has resulted in seven failures: five Spanish, one Greek, and one German institution were unable to earn a passing mark… with a combined $4.5 billion shortfall. They are as follows:

* CajaSur (Spainish)

* A Caixa Catalunya group (Spainish)

* A Caixa Sabadell group (Spainish)

* Caja Duero-Caja Espana (Spainish)

* Banca Civica (Spainish)

* Agricultural Bank of Greece SA (Greek)

* Hypo Real Estate Holding AG (German)

As expected, right out of the gate the credibility of the stress test is being called into question.

According to Bloomberg:

“Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks have insufficient reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said today…

“…’The amount of capital needed is much lower than the market expected,’ said Mike Lenhoff, London-based chief strategist at Brewin Dolphin Securities Ltd., whose parent company oversees $33 billion. ‘The amount does seem quite trivial considering the concerns about losses from the sovereign crisis.’ [...] estimates for the amount banks would need to raise ranged from 30 billion euros at Nomura Holdings Inc. to as much as 85 billion euros at Barclays Capital. Tests carried out in the U.S. last year found 10 lenders including Bank of America Corp. and Citigroup Inc. needed to raise $74.6 billion of capital.

“…’The long awaited stress tests do not seem to have been that stressful after all,” said Gary Jenkins, an analyst at Evolution Securities Ltd., in a note. “The most controversial area surrounds the treatment of the banks’ sovereign debt holdings.”

As the article also points out, one of the main reasons the banks looked better than expected is the test focused on government bonds the banks actively trade, as opposed what’s actually a greater share of bank holdings, the sovereign debt held to maturity. We’ll be sure to keep you posted on additional weaknesses in the bank test as they emerge.

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