Stress tests pressure 24 banks to raise capital

As many as 24 European banks will be under pressure to show they can raise capital after failing, or barely passing, a second round of stress tests by regulators.

Eight failed the European Banking Authority’s stress tests yesterday, with a combined shortfall of ¤2.5 billion ($3.5 billion). As many as 16 more will need to bolster capital after their core Tier 1 ratio dropped below 6 per cent, little more than the assessment’s 5 per cent pass-mark, the EBA said.

“Six per cent is the defacto pass-rate,” said Huw van Steenis, a banking analyst at Morgan Stanley in London. The result “puts pressure on national regulators to turn their attention to the banks which just passed.”

 

The tests mark a clash between the European Union regulator and national counterparts over what counts as capital. The EBA is pushing banks to raise more and better capital to meet the Basel III guidelines and boost investor confidence in the industry amid the sovereign debt crisis. Both German and Spanish regulators said their banks have enough. German lenders criticized the “political” stress tests for excluding a kind of non-voting capital recognized by local regulators.

“Neither the EBA’s 5 per cent core capital hurdle, nor its decision on the composition of that capital, have legal equivalence,” the DSGV savings banks association said yesterday. “This is a case of high-handed measures being set to achieve political goals.”

‘Problem Children’
Greece’s EFG Eurobank Ergasias SA (EUROB) and Agricultural Bank of Greece (ATE) SA, Austria’s Oesterreichische Volksbanken AG (VBPS) and Spain‘s Banco Pastor SA (PAS), Caja de Ahorros del Mediterraneo (CAM), Banco Grupo Caja3, CatalunyaCaixa and Unnim failed. They were found to have insufficient reserves to maintain a core Tier 1 capital ratio of 5 per cent in the event of an economic slowdown. All banks examined in Italy, Germany, France, the U.K. and Ireland passed.

“The problem children are going to be the 16 banks between 5 and 6 per cent, and what happens to those,” said Joseph Dickerson, a banking analyst at Espirito Santo Investment Bank in London. “The market will put substantial pressure on those banks to raise capital.”