Eight Banks Fail Stress Test With 2.5 Billion-Euro Shortfall
July 15 (Bloomberg) -- Eight banks failed the European Union stress tests after regulators said today they had a combined capital shortfall of 2.5 billion euros ($3.5 billion), less than predicted by analysts and investors.
Greece's EFG Eurobank Ergasias SA and Agricultural Bank of Greece SA, Austria's Oesterreichische Volksbanken AG and Spain's Banco Pastor SA, Caja de Ahorros del Mediterraneo, Banco Grupo Caja3, CatalunyaCaixa and Unnim failed. As many as 16 more lenders will need to bolster capital after scraping through, the European Banking Authority said. All banks examined in Italy, Germany, France, the U.K. and Ireland passed.
The EBA's attempt to bolster confidence in the industry has been criticized by analysts for excluding a Greek default. Last year's tests by the EBA's predecessor were also attacked for not being tough enough: banks then were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Investors expected as many as 15 banks to fail and raise 29 billion euros after the latest assessments, according to a survey by Goldman Sachs Group Inc. last month.
"It feels the same as last year," said Richard Barfield, a director at accounting firm PwC in London. Investors "are more interested in the disclosure of the sovereign exposures in the detailed analysis."
The criteria include a review of how the 90 lenders tested would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets and trading losses on sovereign debt not held to maturity.
'Very Contentious'
"We're aware the treatment of sovereign exposures is very contentious," Andrea Enria, EBA chairman, told reporters at a press conference in London today.
The cost of insuring European financial-company debt against default stayed higher after the tests. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers was 9.5 basis points higher on the day at 189 basis points as of 5:30 p.m. in London, unchanged after the test results were released. The euro and the pound were little changed against the dollar.
The failures were found to have insufficient reserves to maintain a core Tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.
A further 16 banks, including seven in Spain, barely passed with a core Tier capital 1 ratio of between 5 percent and 6 percent. Those lenders included Banco Comercial Portugues SA, Espirito Santo Financial Group SA, Germany's HSH Nordbank AG and Norddeutsche Landesbank.
'Low Expectations'
"The market had very low expectations for the stress tests," said Huw van Steenis, a banking analyst at Morgan Stanley. "But the EBA's focus on the 16 banks which were on the cusp of failure, with capital of between 5 percent and 6 percent is a step in the right direction. It's a very cleverly worded document which puts pressure on national regulators to turn their attention to the banks which just passed."
BCP and Espirito Santo will bolster capital or sell assets in the next three months, the Bank of Portugal said today.
About 20 banks would have failed had they not raised capital through April, the EBA said. The capital shortfall would have totaled 26.8 billion euros without the additional money, the regulator said. In all, European lenders raised 50 billion euros of capital from January to April, according to Enria.
'Necessary Steps'
"For those banks that have not met the threshold, and for those that have but still demonstrate substantial weaknesses, we expect them to take all the necessary steps to reinforce their capital positions," Michel Barnier, the EU's financial services commissioner, and Olli Rehn, the economic and monetary affairs commissioner, said in an e-mailed statement today in Brussels.
The EBA included a 25 percent writedown in the value of Greek 10-year government bonds in the tests, it said today. ATEbank, one of two Greek banks that failed, said its exposure to 7.85 billion euros of Greek sovereign bonds and loans was the main reason for its failing the test.
The five Spanish banks that failed have a combined shortfall of 1.56 billion euros, with CAM accounting for 947 million euros. Even so, none of lenders that failed will need to raise capital because they have other instruments that absorb losses, according to the Bank of Spain.
Volksbanken, Austria's fourth-biggest lender, failed with a core Tier 1 capital ratio of 4.5 percent in the test's adverse scenario. About a third of its capital was disqualified under EBA's rules for the exam, the lender said today. The Austrian bank and the two failed Greek banks are also selling assets to boost capital.
Helaba Refusal
One further bank may have failed the test. Landesbank Hessen-Thueringen on July 13 refused to give the EBA permission to publish all of its data as it disputes the regulator's measurements of core Tier 1 capital because they don't include some instruments allowed by German regulators. That would push the lender's core capital ratio to below the 5 percent threshold required to pass the test.
Rating company Standard & Poor's own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a "sharp" increase in yields and a "severe" economic downturn.
Sovereign Crisis
The results come during a week of rising sovereign debt yields. The yield on two-year Greek notes rose above 32 percent this week and the extra rate investors demand to hold its 10- year bonds relative to German bunds of similar maturity was 14 percentage points. Credit-default swaps indicate an 86 percent chance Greece will fail to meet its commitments within five years, according to CMA prices.
Concern about Greece also triggered a surge in 10-year borrowing costs for Italy and Spain this week to the highest since the introduction of the euro in 1999. The cost of insuring Irish and Portuguese government bonds also hit records this week, implying a 60 percent chance of default.
Banks' disclosure of the size and maturity of their holdings of sovereign debt will allow analysts to model their own stress tests, a potential threat to financial stability, according to a confidential document prepared by EU officials. There is an expectation the results will be "challenged by market tests" aiming to address "the perceived weaknesses in the design," according to the paper obtained by Bloomberg News.
Euro-area government leaders will hold a special summit on July 21 to put added political momentum behind efforts to halt the debt crisis, European Union President Herman van Rompuy said after the stress test results were announced.
"It's an interesting academic exercise," said Alex Potter, a banking analyst at Berenberg Bank in London. "But I think gyrations in the sovereign market and the true creditworthiness of some European governments, as well as the political willingness to form a consensus, are far larger stories than the stress tests."
Failures: Spain: Caja de Ahorros del Mediterraneo Banco Pastor Grupo Banco Grupo Caja Unnim CatalunyaCaixa Greece: Agricultural Bank Of Greece EFG Eurobank Austria: Oesterreichische Volksbank Near-failures with 5 percent to 6 percent core Tier 1: Espírito Santo Fin Group Marfin Popular Bank Piraeus Bank Group Nova Ljubljanska Banka Banco Popular Español NovaCaixaGalicia Bankinter Banco Comercial Português BFA Bankia HSH Nordbank Hellenic Postbank Norddeutsche Landesbank Grupo Banca Civica Caixa Ontinyent Banco Popolare Banco De Sabadell
To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net Gavin Finch in London at gfinch@bloomberg.net
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net Anthony Aarons at aaarons@bloomberg.net
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