25 Eurozone banks fail ECB stress tests
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.