Eight of 90 banks fail stress test

EIGHT of 90 banks have failed a stress test when they had a combined shortfall of €2.5 billion to survive another economic setback.

All three Irish banks, Allied Irish Bank, Bank of Ireland and Irish Life and Permanent, passed.

Analysts were quick to point out, however, that the positive results would not resolve the worsening eurozone situation. The leaders of the 17 euro area countries are to hold an extraordinary summit in Brussels next Thursday, raising hopes that they will agree a comprehensive solution to the Greek crisis.

While Andrea Enria, the head of the European Banking Authority (EBA) which devised the tests, described the hypothetical scenario as that of a severe recession, some analysts said it should have included a default by Greece. The test included haircuts to the trading books of banks to reflect the mark to market exposure

Twenty banks would have failed had they not been allowed to add in about €50bn they had raised or received from state support to improve their capital over the four months to April. Sixteen that had a core tier 1 capital of just over the required 5% were put on a watch list and told they must raise the money by April next year while those that failed have until the end of the year.

The three Irish banks would have failed had they not been able to factor in the current and future funding, mainly from the state that includes part of the EU/IMF bailout.

The failed banks were all relatively small. Five were Spanish which have been under severe pressure because of the housing collapse. One of them accounted for more than 40% of the total capital shortfall. Two Greek and one Austrian bank also failed. A German state owned bank that pulled out of the tests also failed to reach the threshold.

While there was relief that the Italian banks all passed, they have come under a lot more strain in the past week than that applied in the tests as the eurozone crisis threatened to spread to the country. The parliament passed a €70bn austerity programme yesterday.

However Mr Enria, who heads up the recently created independent regulation authority, said that they did not just look at the figures put forward by the banks. “This is more than a pass-fail exercise. There is supervisory judgement here” adding that when they had added in more pessimistic scenarios such as sovereign exposure when they believed there was too much optimism.

But, he added, “The situation risk outlook for the European banks in general is a source of concern” especially if the sovereign debt crisis got worse and banks with a sizeable exposure to sovereign debt must increase their core Tier 1 capital even more.

The tests were more severe than those posed last year which were discredited after Allied Irish Bank having passed needed a massive bailout within weeks and later contributed to the country having to take a €67.5bn bailout from the EU/IMF.

The bar is being raised higher for the banks as they will need to increase their capital even higher to meet the new Basle banking requirements of 7% by January 2013.

Finance Minister Michael Noonan said the tests “confirmed the overall soundness and resilience of the EU banking sector which should provide comfort and reassurance to businesses, consumers and investors alike”.

He said he was pleased that the three Irish institutions passed on the basis of the actions underway to increase their capital position. “The result of the EBA stress test for the three confirms the finding of the PCAR test and no additional capital requirement has been identified... The institutions will continue with the deleveraging and restructuring work”.

Bank of Ireland recorded a 7.1% core Tier 1 ratio as of April 30, above the 5% threshold under the adverse test, and rising to 8.7% by the end of 2012. Allied Irish Banks posted a 10% capital ratio, rising to 11.7% over the same period, while Irish Life and Permanent recorded a 20.4% capital ratio, easing to 20.0% by the end of next year, according to the EBA test.