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EU banks take stress well

Only seven of the 91 banks tested failed the EU-wide stress test that has been coordinated by the Committee of European Banking Supervisors (CEBS) and the European Central Bank (ECB). The exercise has been widely criticized for being too soft, but EU policymakers say that the results confirm the strength of the EU’s financial system. The two Hungarian banks tested, OTP and FHB performed well above the expected level.

The seven banks that failed the region’s stress tests fell short of a combined capital of €3.5 billion ($4.5 billion).

Spain’s banking system, to no surprise, took the greatest hit, with five of the seven banks to fail. Four Spanish savings-bank groups and a bank seized by regulators failed the stress tests for a combined capital shortfall of €1.84 billion. All eight Spanish commercial banks tested passed the examination. After the results were released, an executive director with Banco Santander SA, the country’s largest bank, told Bloomberg that Spain’s banking system is one of the world’s healthiest, even after five of the country’s lenders failed the stress test.

Of the 14 German banks tested, only Hypo Real Estate failed to pass.

“Had Hypo Real Estate not failed the test, this would have meant the stress tests would have been a real joke,” Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets commented the results to Bloomberg. “The bank is under reconstruction anyway and will be recapitalized by the German government, so this doesn’t really matter for the market.”

Hypo Real Estate would have passed the test if it had received all the capital it requested from Germany’s Soffin bank-rescue fund, the Munich-based lender said in an e-mailed statement following the publication of the results.

Agricultural Bank of Greece SA failed the European Union’s stress test with a Tier 1 ratio of 4.36% under an adverse scenario with additional sovereign shock as of Dec. 31, 2011.

European governments are using their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal. Rising budget deficits in those countries raised concern that they won’t be able to pay their debts. The test has been criticized for not being strict enough.

“This is not reassuring at all,” Komal Sri-Kumar, a chief global strategist at TCW Group Inc. in Los Angeles told Bloomberg. “These tests were set in such a way that most of them would pass. That doesn’t say to me that the banking system is stable.”

However, European policy makers are satisfied with the results saying that it highlights the strength of their financial systems and rejected criticism the probes were too soft as 92% of the lenders passed.

Results of the stress test were called “mildly positive” by Credit Suisse Group AG. Before the results were published, analysts at Goldman Sachs Group Inc. estimated that lenders would need to raise €38 billion and Barclays Capital said they would require as much as €85 billion euros. Tests carried out in the US last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion.

Now that most major European banks have sailed through their long-awaited stress test they face a stiffer challenge in the months ahead: raising billions of dollars of long-term funding to finance new lending, The Wall Street Journal wrote after the results were published.

The test, that has been used for years now to see how resilient banks are to possible shocks, has been conducted on a consolidated bank-by-bank basis for a sample of 91 EU banks from 20 EU member states, covering about 65% of the banking sector, in terms of total consolidated assets in all of the 27 countries. In each member state, the participating banks are supposed to cover more than 50% of total bank assets. The exercise took into account the situation as of end of 2009 and analyzed the evolution of Tier 1 capital and the Tier 1 ratio of the banks on the basis of three possible scenarios for 2010 and 2011. (BBJ)