Results of the 2011 EU Stress Test Released

Sources:
FT: EU Stress Test Pass Rate Under Fire
WSJ: Few Banks Fail EU Exams
Economist: Europe’s Stress Test: Disease and Cure

The European Banking Authority (EBA) recently released the results of the 2011 EU-wide stress test. While analysts expected that fifteen to twenty banks would fail the test, only eight banks out of ninety banks from twenty-one countries failed to meet a minimum standard—a core Tier-1 capital ratio (a measure of a bank's strength to absorb losses) of 5 percent—after enduring the test’s worst-case scenarios. A German bank, Helaba, also failed the test, but the bank did not allow the EBA to release its test results. ATE, a Greek bank, was the worst performing bank with a core Tier-1 capital ratio of minus 0.8 percent.

Investors and analysts claim that the test was not tough enough and failed to restore confidence in Europe’s financial markets. In particular, the test’s worst-case scenario did not include the chance of a Greek default. EBA officials also agree that the test was not rigorous enough in part due to “conflicting political pressures” from banks and governments. However, the EBA officials defend the test, saying that the test is still valuable because investors and analysts now have access to data about banks’ exposures to sovereign assets, including Greek debt. Also, Andrea Enria, chairman of the EBA, said that that the test had been “a catalyst for pressure to raise capital.” Over the four months from the end of December to the end of April, banks raised around €100 billion of additional capital.

The EBA formally recommended that national regulators should require eight banks that failed the test to raise fresh capital (€2.5 billion) by the end of this year. Also, sixteen additional banks that barely passed the test with the ratios of between 5 and 6 percent need to improve their capital position by April 2012. Spain was the worst performing nation. Among those twenty-four failing or nearly failing banks, twelve are Spanish, including Caja de Ahorros del Mediterraneo, which will be required to raise additional capital of €947 million. If these banks cannot raise the capital, their national governments may have to provide assistance to them. The EBA will publish two reports on the progress those banks make in February and July next year.