Europe stress-test results are out and only seven banks were found to be incapable of enduring another recession. However, no major banks have failed the test. The findings of the stress test that covered around 91 banks — accounting for 65% of the banking market in Europe and approximately 50% of the market share in each member country — were declared last Friday in an effort to restore the transparency and reliability of the European banking system following the debt crisis in Greece.
Europe’s biggest banks, such as Barclays Plc. (BCS), HSBC Holdings Plc. (HBC), Royal Bank of Scotland Group Plc. (RBS) and Lloyds Banking Group Plc. (LYG) have all passed the test. Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA) of Spain, ING Group, N.V. (ING) of the Netherlands, and Deutsche Bank AG (DB) of Germany also came out successful.
The failed banks — one German, one Greek and five Spanish banks — were asked to raise €3.5 billion ($4.5 billion) to fortify their capital levels. The five Spanish banks were the nation’s saving banks called cajas. The state-owned Hypo Real Estate Holding AG in Germany and ATE bank in Greece failed the test.
Banks were tested to see whether they have sufficient financial strength to survive serious economic shocks. Evaluations were based on the banks’ ability to absorb additional potential shocks from credit and market risks, including the exposures to European sovereign debt. The stress test focused on capital adequacy, though liquidity risks were not directly stress tested.
Stressed economic scenarios in this year and the next year were considered, along with additional losses on government bonds. In such a situation, the banks that fell short of a Tier 1 capital ratio above 6% by the end of 2011 failed the test.
By contrast, in the last year’s stress test, a small number of banks were covered and only aggregate results were published. The decision to subject more banks to the stress test comes amid pressures on European banks. The interbank lending market choked in May this year emanating from the susceptibility of institutions to the Greek debt default and the significant declines in bond values that Spain issued.
However, the stress test results have been subject to criticism. The results have been condemned on grounds of being less stressful. The potential losses only on government bonds the banks trade were considered and not those that are held to maturity since no sovereign defaults were considered in the exercise.
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