1 in 5 eurozone’s top banks fail health tests
Print Edition
ROUGHLY one in five of the eurozone’s top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said yesterday.
The ECB found the most critical problems to be in Italy, Cyprus and Greece but concluded that banks’ capital holes had since been plugged and that only 10 billion euros (US$13 billion) remained to be raised.
Italy’s financial sector faces the biggest challenge with nine of its banks falling short. Monte dei Paschi had the largest capital hole to fill at 2.1 billion euros, even after its money raising efforts this year.
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.
Although investors may take heart, it remains to be seen whether the exercise can spur banks to lend more as the region’s economic growth stutters to a virtual halt.
While 25 of the eurozone’s 130 biggest banks failed the health check at the end of last year with a total capital shortfall of 25 billion euros, a dozen have already raised 15 billion euros this year to make repairs.
Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013.
A recent survey by Goldman Sachs of large institutional investors found they believed the ECB ought to ask lenders to raise an additional 51 billion euros of capital for the tests to be credible.
Cautious welcome
Once overvalued loans across the sector were taken into account, the ECB said the overall impact on banks was 62 billion euros.
Analysts gave the results a cautious welcome, although some cautioned that it was only the beginning rather than the end of a banking cleanup in Europe.
“Although this should restore some confidence and stability to the market, we are still far from a solution to the banking crisis and the challenges facing the banking sector,” said Colin Brereton of PwC.
The exercise, which saw officials trawl through more than 40 million individual bank figures, has two parts — a strict review by the ECB of assets such as loans, followed by a wider test of how banks would cope with a new economic crash.
It is the fourth attempt by Europe to clean the stables of its financial sector and has been billed as the most rigorous.
Previous efforts failed to spot problems, giving lenders in Ireland a clean bill of health shortly before a banking crash drove the country to the brink of financial collapse.
“It 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 percent of their risk-weighted assets, a measure of the riskiness of a banks’ loans and other assets, if the economy grows as expected over the next three years, and capital of at least 5.5 percent 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.
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