ECB fails 25 banks in stress test,

but capital needs low

Latvia's lats and euro banknotes and coins are seen in this illustration picture in Riga
March , 2!"#$
BY LAURA NOONAN AND EVA TAYLOR-
FRANKFURT Sun Oct 26, 2014
%Reuters& ' Roughl( one in five of the euro )one's top lenders failed land*ark health
checks at the end of last (ear but *ost have since repaired their finances, the European
Central Bank said on +unda($
,he ECB found the *ost critical proble*s to be in -tal(, C(prus and .reece but
concluded that banks' capital holes had since chiefl( been plugged and that onl( "!
billion euros re*ained to be raised$
-tal('s financial sector faces the biggest challenge with nine of its banks falling short$
Monte dei /aschi had the largest capital hole to fill at 2$" billion euros, even after its
*one( raising efforts this (ear$
,he e0ercise provides the clearest picture (et of the health of the euro )one's banks
*ore than seven (ears after the eruption of a financial crisis that al*ost bankrupted a
handful of countries and threatened to fracture the currenc( bloc$
1lthough investors *a( take heart, it re*ains to be seen whether the e0ercise can spur
banks to lend *ore as the region's econo*ic growth stutters to a virtual halt$
2hile 25 of the euro )one's "#! biggest banks failed the health check at the end of last
(ear with a total capital shortfall of 25 billion euros, a do)en have alread( raised "5
billion euros this (ear to *ake repairs$
1longside -tal(, regulators said three .reek banks, three C(priots, two fro* both
Belgiu* and +lovenia, and one each fro* 3rance, .er*an(, 1ustria, -reland and
/ortugal had also *issed the grade as of end'2!"#$
1 recent surve( b( .old*an +achs of large institutional investors found the( believed
the ECB ought to ask lenders to raise an additional 5" billion euros of capital for the
tests to be credible$
4nce overvalued loans across the sector were taken into account, the ECB said the
overall i*pact on banks was 52 billion euros$
1nal(sts gave the results a cautious welco*e, although so*e cautioned that it was onl(
the beginning rather than the end of a banking clean'up in Europe$
61lthough this should restore so*e confidence and stabilit( to the *arket, we are still
far fro* a solution to the banking crisis and the challenges facing the banking sector,6
said Colin Brereton of /wC$
,he e0ercise, which saw officials trawl through *ore than 7! *illion individual bank
figures, has two parts 8 a strict review b( the ECB of assets such as loans, followed b( a
wider test of how banks would cope with a new econo*ic crash$
-t is the fourth atte*pt b( Europe to clean the stables of its financial sector and has
been billed as *uch the *ost rigorous$
/revious efforts failed to spot proble*s, giving lenders in -reland a clean bill of health
shortl( before a banking crash drove the countr( to the brink of financial collapse$
6-t is credible,6 said 9icolas :eron of Brussels think tank Bruegel$ 6But it is onl( the
start of a longer se;uence of cleanup that will e0tend well into 2!"5$6
,he ECB's pass*ark was for banks to have high';ualit( capital of at least < percent of
their risk'weighted assets, a *easure of the riskiness of a banks' loans and other
assets, if the econo*( grows as e0pected over the ne0t three (ears, and capital of at
least 5$5 percent if it slides into recession$
Banks with a capital shortfall will have to sa( within two weeks how the( intend to
close the gap$ ,he( will then be given up to nine *onths to do so$
1 C4R9ER ,=R9E>?
,he ECB has staked its reputation on delivering an independent assess*ent of euro
)one banks in an atte*pt to draw a line under (ears of financial and econo*ic strife in
the bloc$
ECB :ice /resident :itor Constancio said the e0ercise would ensure that 6econo*ic
recover( will not be ha*pered b( credit suppl( restrictions6$
But there is no certaint( bank lending will pick up as the ECB hopes$
6,hinking that lending so*ehow can lead .>/ is an illusion, and - don@t know how
that has so*ehow crept into the polic( debate,6 said Erik 9ielsen, global chief
econo*ist at =nicredit$
3or *an( banks, the biggest i*pact of the ECB tests was not in identif(ing capital
holes but in finding that their assets, such as loans, had been overvalued$
-n total, the ECB said banks had been valuing their loans and assets at 7< billion euros
*ore than the( are reall( worth$
,hat accounted for "" billion of the 25 billion euros banks were collectivel( short of at
the end of last (ear$ -t also eroded #A billion euros of capital a*ongst the banks that
passed bringing the total i*pact on the sector to 52 billion euros$
1*ong the *aBor listed banks, the biggest hits were to .reece@s /iraeus bank, whose
core capital fell b( #$A percentage points after the ECB adBusted the bank@s capital to
reflect the new asset valuations$
Monte dei /aschi's capital was reduced b( al*ost a third, a figure that counts for
al*ost # billion euros$ ,here was also a big i*pact on 1ustria@s Erste Bank$
,he adBust*ents put *an( banks in an unco*fortable position$ ,hirt('one had core
capital of below the "! percent *ark viewed b( investors as a safet( threshold, while a
further 2< were on the borderline with ratios Bust " percentage point above$
,he ECB will not i**ediatel( force lenders with overvalued assets to take re*edial
action but the( will have to hold *ore capital eventuall(, leaving less roo* to e0pand,
lend or pa( dividends$
3or lending, the *ore funda*ental ;uestion is whether the de*and for credit is there$
,he ECB is about to take on its new regulator( responsibilities but it *a( be its
*onetar( polic( powers that the euro )one needs *ost$
6Businesses need to believe in an increase in the de*and for their products before
asking for credits, and now that e0ternal de*and growth is no longer there, this is
when the euro )one needs de*and sti*ulus,6 9ielsen said$
%1dditional reporting b( Cohn 4'>onnell and /aul Carrel in 3rankfurt, Duw Cones and
+teve +later in London$ 2riting b( Mike /eacock and Cohn 4'>onnell, editing b(
1le0ander +*ith&
/osted b( ,hava* a