Seven banks fail European stress test

A total of seven out of 91 banks have failed the European banking stress test. Hypo Real Estate of Germany, five Spanish banks and one bank in Greece all failed. All British banks passed the test.

The Spanish banks to fail the test were Unnim, Cajasur, Diada, Espiga, Banca Civica, alongside Greek bank, Atebank.

The four UK banks tested, Barclays, HSBC, Lloyds and RBS, all passed the test with their balance sheets deemed to be strong enough to cater for the most extreme shock scenarios.

The FSA said the results underlined the preparedness and resilience of UK banks under unlikely adverse economic scenarios. The regulator said: 'The resilience is a result of the considerable work that has been undertaken to strengthen UK banks in recent years.'

The test was designed to assess the resilience of the EU banking system to possible adverse economic developments in the wake of the credit crunch. It assessed the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks.

The 91 banks tested, represented 65% of the European market in terms of total assets. It has been conducted over a two-year horizon, until the end of 2011, under severe assumptions.

The report concluded that aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to €566 billion in 2010.  

It predicted the aggregate tier 1 ratio - a common measure of banks’ resilience to shocks - would decrease from 10.3% in 2009 to 9.2% by the end of 2011.

The regulatory minimum is 4% and the ECB set a 6% minimum for the exercise. The seven banks to fail fell below the 6% mark but remained above the 4% margin.  

Capital Economics questioned whether the tests were strong enough and said worries about the banking sector are likely to persist, with today's results unlikely to have significantly positive impact on the economic outlook.

Capital Economics analyst Jennifer McKeown said: 'Any positive impact on sentiment will be limited by the fact that the tests were not particularly stringent. The “adverse” economic scenario incorporated a return to only a very mild recession next year.

'What’s more, the prospect of an outright sovereign default (which is what has worried markets most) has not even been considered. Losses of only up to 23% on Greek debt have been factored in and even those have only been applied to banks’ trading books, not their banking books where the majority of such bonds are apparently held.'