EIGHT OUT OF 91 European banks have flunked stress tests that project how they would fare in another recession, and 16 more barely passed, Europe’s banking regulator has announced.
The failing banks should “promptly” take steps to strengthen their financial cushions against losses, the European Banking Authority said as it released the results. In Spain, five banks failed in total; in Greece that number was two; and in Austria one failed assessment. In these banks, the capital ratios were below 5 per cent under worst-case scenario.
The banks that barely passed may also face pressure to strengthen their finances along with the ones that failed. These countries include: Cyprus (1), Germany (2), Greece (2), Italy (1), Portugal (2) and Slovenia (1).
The EBA lacks the power, however, to force banks to raise more capital — whether from investors or governments — or to make them merge or sell businesses. Only their national governments can do that.
The three Irish institutions assessed by the European Banking Authority have passed stress tests: Allied Irish Bank, Bank of Ireland and Irish Life & Permanent all passed, as expected.
The tests are a key element in fighting Europe’s debt crisis. Officials want to identify weak banks and make them strengthen their finances so they could survive a possible default on government bonds by Greece or another heavily indebted country.
The test, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts. For the 17-country eurozone, that would be a drop of 0.5 per cent this year and 0.2 per cent next year.
Some said the tests were not tough enough because they did not include a scenario in which Greece defaults on its government bonds. That is considered a key risk for Europe’s economy.
Additional reporting by the AP
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