Image via WikipediaFRANKFURT — Seven of Europe’s 91 largest banks would struggle to survive an unexpected decline in economic growth or a sharp deterioration in the value of European government bonds, and will need to raise more capital, regulators said Friday in releasing results of closely watched bank stress tests.Banks to flunk were Hypo Real Estate, a bank based in Munich that is already government-owned after a bailout, ATEBank of Greece and five Spanish savings banks.
Several other banks passed the test, but narrowly enough that they may also face market pressure to increase their reserves. That group included Postbank, one of Germany’s biggest publicly traded banks, which is 25 percent owned byDeutsche Bank.
Governments in the countries affected, or the banks themselves, said they were ready with measures to raise more money for banks whose reserves were considered too low to withstand the worst-case outlooks.
After months of turmoil in markets caused by Europe’s sovereign debt crisis and its effects on the banking system, governments and investors alike were looking to the tests to see if Europe could demonstrate that it was finally confronting the problems and dealing with them head on. Whether the tests succeed in reviving confidence depends on whether investors and analysts believe they were severe enough to expose vulnerable banks.
“The stricter the better for the euro,” said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets.
Nicolas Véron, a visiting fellow at the Peterson Institute for International Economics in Washington, called the level of detail released “disappointing.”
“Investors cannot reverse-engineer the results and apply their own assumptions,” he said.
Bank regulators and central bankers insisted that the tests were rigorous and that fears about the stability of European banks were overblown.
“It is a very serious test,” Franz-Christoph Zeitler, a member of the executive board of the Bundesbank, Germany’s central bank, said at a news conference in Frankfurt. “All this criticism was absolutely premature.”
The stress tests, similar to an exercise conducted in the United States last year, were intended to rebuild confidence in European financial institutions that has been shaken by the sovereign debt crisis. Uncertainty about which banks may be sitting on piles of Greek debt and other potentially toxic assets has made institutions reluctant to lend to each other as well as to businesses, and acted as a drag on economic growth.
Some banks had already moved to raise capital ahead of the results. National Bank of Greece, which passed the test, said Friday that it sold €450 million, or $580 million, of 10-year bonds to bolster its regulatory capital. “The sale process was completed within just four days, reflecting the investment community’s confidence in N.B.G.,” the lender said.
Banca Cívica, a merger of three smaller savings banks in Spain, failed the test. But it said ahead of the results that it had signed an agreement with J.C.Flowers, a U.S. buyout firm, to place €450 million in convertible bonds.
Hypo Real Estate said the stress test had “limited relevance” because it was already in the process of transferring troubled assets to a so-called bad bank underwritten by the German government.
Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, told a new conference that the stress test results vindicated the recent push to force the savings banks, or cajas, to consolidate, as well as the regulatory overhaul to open up their capital to more investors.
The tests were evidence of “the enormous means” of the Spanish banking sector to overcome a crisis, he said. “When there are doubts, you have to be absolutely transparent, and this is what we have done.”
In addition to Banca Cívica, four other unlisted Spanish savings banks failed: Diada, Unnim, Espiga and CajaSur, which was bailed out by the Bank of Spain in May.
In a potential blow to the tests’ credibility, regulators did not examine whether banks could withstand a debt default by Greece or any other European country. European authorities — in contrast to many economists — consider such a possibility unthinkable.
In a compromise, banks were scheduled to detail their holdings of Greek, Spanish, Portuguese and other sovereign bonds. But a report released by the European bank supervisors did not contain that information, which would clear up intense speculation about which banks are most exposed.
To pass the tests, a bank’s Tier 1 capital, a measure of reserves, had to not drop below 6 percent of assets in the face of a new recession and a sovereign debt crisis.
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