Banks get clean bill of health overall

EUROPE’S banks got a clean bill of health from stress tests that assumed a severe double-dip recession and a rise in interest rates over the next two years.

Of the 91 banks tested, seven failed, five of them Spanish, one German and one Greek. The two Irish banks were among the majority that passed.

But the results were immediately attacked by commentators because they did not factor in what would happen if a country defaulted and was unable to repay the money it owed banks.

The test conditions included a sharp reminder that the Irish economy is among the most fragile in the EU. Banks that lent to Greece were given the highest handicap, followed by Portugal, while those holding Irish Government debt were given a weighting almost half of Greece’s but more than Spain.

There was little surprise over the banks found to have insufficient money in reserve to survive another serious recession. They included Munich-based Hypo Real Estate that has already been bailed out by the German government. Two other German banks will need refinancing.

Spain, that pushed the rest of the EU countries into agreeing to publish the results, was known to have some very weak institutions because of the collapse of their housing market.

They tested more of their banks than any other country, knowing that their eight major banks were healthy, but their regional banks were in trouble.

The tests revealed that five of the 19 were indeed weak, some of them not even meeting the legal 4% of capital required.

Just one of Greece’s banks failed. Six of their banks were tested, representing more than 90% of the total assets in the Greek banking sector.

However, the most vulnerable banks are not necessarily in the weakest countries, and for instance several French and German banks that passed the test easily hold huge amounts of Greek, Spanish and Irish debt.

Some said that it was hardly credible that the banks tested, representing 65% of the EU’s banking sector, were found to be undercapitalised by just €3.5bn.

But Giovanni Carosio, chairman of the Committee of European Banking Supervisors that coordinated the tests, said: “You must take into account the starting point. The banks have received more than €200 billion in state aid and they have been able to increase the amount of money they have been holding over the past two years. What we said about the resilience of the European banking sector was true all along.”

Banks that failed will have to raise the additional money they need.


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