“Stress Test” for EU Banks

The European Banking Authority just announced the results of a ‘stress test’ they used to discover how the Eurozone banks would fare if another recession hit. Eight of the 90 banks flunked the test and 16 barely passed, but there is a big controversy over what the EBA allowed the banks to count toward their reserve and what they didn’t.

Banks are required to maintain assets of 5% of their loans in order to meet their reserve requirements. The test attempted to demonstrate what would happen in these banks if a recession hit with growth under 4 percentage points of what potential forecasts predicted (a drop of .5% this year and .2% next year).

Spain reportedly did the worst in the tests, but Germany had two banks barely pass, HSH Nordbank and Norddeutsche Landesbank, and a third, Helaba, withdrew from the testing because the EBA refused to count 1.9 billion euros of their reserve because of a dispute as to whether or not government stakes could be considered capital. Both of the German banks that did participate claimed that the EBA ignored agreements they had with other German states that were co-owners of the banks which would have given them a much stronger showing.

The EBA can do nothing to make the banks change the way they do business nor raise more capital, but one of the goals of the test was to uncover which banks were on unstable legs, needing to make substantial, consistent loans from the European Central Bank in order to stay afloat. They also wanted to verify that banks were not hiding losses and therefore being able to borrow funds more cheaply than their actual standing qualified them for. 

The German bank group stated, “in the current uneasy situation on the financial markets, it cannot be ruled out that this detailed information may seriously exacerbate market volatility or could even be used for speculation against some banks.”

Only each country’s government can require the kind of change the EBA thought was needed; it remains to be seen if they will.

 

Source:

USA Today, World; 8 banks flunk European stress test; 16 more barely pass; Frankfurt, Germany; Copyright 2011 The Associated Press

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