25 Eu­ro­zone banks fail ECB stress tests

Financial Mirror (Cyprus) - - FRONT PAGE -

About one in six of the eu­ro­zone’s top banks failed stress tests based on their cap­i­tal ad­e­quacy at the end of last year, with nine Ital­ian lenders fall­ing short in a com­pre­hen­sive as­sess­ment re­leased on Sun­day by the Euro­pean Cen­tral Bank.

Paint­ing a brighter pic­ture than had been ex­pected, the ECB found the big­gest prob­lems in Italy, Cyprus and Greece but con­cluded that the banks’ cap­i­tal holes had since chiefly been plugged, leav­ing only a mod­est EUR 10 bln to be raised, the EU news and pol­icy site EurAc­tiv re­ported.

Speak­ing shortly after the pub­li­ca­tion of the health checks, Roberto Gualtieri, Chair­man of the Eco­nomic and Mon­e­tary Af­fairs Com­mit­tee of the Euro­pean Par­lia­ment (the ECON Com­mit­tee), said that since the be­gin­ning of the fi­nan­cial cri­sis, the par­lia­ment had been fight­ing hard to cre­ate gen­uine, strong fi­nan­cial su­per­vi­sion at an EU level.

Sun­day’s an­nounce­ments “are a cru­cial step to­wards the full im­ple­men­ta­tion of the Bank­ing Union that will put an end to mar­ket frag­men­ta­tion. The im­por­tance of the work of the ECB and the Euro­pean Bank­ing Au­thor­ity can­not be overem­pha­sised: the tests are not an aca­demic ex­er­cise, but part of a larger ef­fort to put the EU bank­ing sec­tor on solid foot­ing and to make credit flow to the real econ­omy and bring back growth and jobs,” Gualtieri said.

“The Euro­pean Com­mis­sion will have to en­sure that the state aid rules are fully re­spected and we look for­ward to hear­ing Com­mis­sioner Mar­grethe Vestager at the ECON Com­mit­tee on 11 Novem­ber. It is ex­tremely im­por­tant to en­sure a lev­elplay­ing field,” he said.

Italy faces the big­gest chal­lenge with nine of its banks fall­ing short and two still need­ing to raise funds. The test, de­signed to mark a clean start be­fore the ECB takes on su­per­vi­sion of the banks next month, said Monte dei Paschi di Siena had the largest cap­i­tal hole to fill at EUR 2.1 bln.

The ex­er­cise pro­vides the clear­est pic­ture yet of the health of the eu­ro­zone’s banks more than seven years after the erup­tion of a fi­nan­cial cri­sis that almost bankrupted a hand­ful of coun­tries and threat­ened to frac­ture the cur­rency bloc.

While 25 of the eu­ro­zone’s 130 sys­temic banks failed the health check at the end of last year with a to­tal cap­i­tal short­fall of EUR 25 bln, a dozen have al­ready raised EUR 15 bln this year to make re­pairs.

ECB Vice Pres­i­dent Vi­tor Con­stan­cio said the re­sults could en­cour­age banks to lend, adding that “there is some pick up (in de­mand), but it is still slight.”

Reg­u­la­tors said three Greek banks, three in Cyprus, two from both Bel­gium and Slove­nia, and one each from France, Ger­many, Aus­tria, Ire­land and Por­tu­gal had also missed the grade as at the end of 2013.

An­a­lysts gen­er­ally gave the re­sults a cau­tious wel­come, say­ing they marked the be­gin­ning rather than the end of a bank­ing clean-up in Europe.

“I con­sider the stress test as an im­por­tant par­tial suc­cess, which will help re­duce un­cer­tainty,” said Mar­cel Fratzscher, pres­i­dent of Ger­many’s DIW eco­nomic in­sti­tute.

“How­ever, im­por­tant chal­lenges re­main un­solved. The stress test alone will not end the credit crunch for small and mid-sized com­pa­nies in south­ern Europe.” Some were more crit­i­cal. “The real is­sue is the size of the cap­i­tal short­fall and that is very, very small. I don’t feel a whole lot more re­as­sured about the health of the bank­ing sys­tem to­day than last week,” said Karl Whe­lan, an economist with Univer­sity Col­lege Dublin.

The ex­er­cise pro­vided a snap­shot of banks’ vi­tal statis­tics and forced them, for ex­am­ple, to re­vise the amount of risky loans - which have not been ser­viced in 90 days - up­wards by EUR 136 bln to EUR 879 bln.

The ex­er­cise is cred­i­ble, said Ni­co­las Veron of Brussels think tank Bruegel. “But it is only the start of a longer se­quence of cleanup that will ex­tend well into 2015.”

The ECB’s pass­mark was for banks to have high-qual­ity cap­i­tal of at least 8% of their risk-weighted as­sets, a mea­sure of the risk­i­ness of a bank’s loans and other as­sets, if the econ­omy grows as ex­pected over the next three years, and cap­i­tal of at least 5.5% if it slides into re­ces­sion.

Banks with a cap­i­tal short­fall will have to say within two weeks how they in­tend to close the gap. They will then be given up to nine months to do so.

For many banks, the big­gest im­pact of the tests was not in iden­ti­fy­ing cap­i­tal holes but in find­ing that their as­sets, such as loans, had been over­val­ued. In to­tal, the ECB said banks had been valu­ing their loans and as­sets at EUR 48 bln more than they are re­ally worth. This was be­cause they had not recog­nised EUR 136 bln of bad loans. Among the ma­jor listed banks, the big­gest hits were to Greece’s Pi­raeus Bank, whose core cap­i­tal fell by 3.7 per­cent­age points after the ECB ad­justed the bank’s cap­i­tal to re­flect the new as­set val­u­a­tions.

Monte dei Paschi’s cap­i­tal was re­duced by almost a third. There was also a big im­pact on Aus­tria’s Erste Bank.

The ECB will not im­me­di­ately force lenders with over­val­ued as­sets to take re­me­dial ac­tion but they will have to hold more cap­i­tal even­tu­ally, leav­ing less room to ex­pand, lend or pay div­i­dends.

“The ex­er­cise has used a common frame­work to as­sess the cap­i­tal needs of banks and marks the sub­stan­tial progress that has been achieved to­wards a bank­ing union,” said Gerry Rice, Di­rec­tor of the Com­mu­ni­ca­tions Depart­ment at the IMF.

“The high level of trans­parency and com­pa­ra­bil­ity of the re­sults will en­able mar­ket par­tic­i­pants to make their own as­sess­ments of bank health, which should help boost con­fi­dence,” Rice added.

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