Major European banks pass stress test

29 July 2010 | By Lee Jones

All the major European banks passed the Committee of European Banking Supervisors’ stress test while seven small government-controlled banks failed.

Critics have claimed that the tests were not tough enough and that the outcome will not be enough to restore investor confidence. Royal Bank of Scotland, HSBC, Lloyds Banking Group and Barclays all passed. The European body has revealed that seven banks’ tier-one capital ratios would fall below 6 per cent if they were exposed to severe adverse conditions through 2010 and 2011. The current minimum regulatory threshold is 4 per cent but the CEBS used 6 per cent as a stress threshold. Banks that failed are Spain’s Cajasur, Espiga, Unnim, Diada and Banca Civica, Greece’s ATEBank and Germany’s Hypo Real Estate.

Under the conditions of a drop in European GDP of 3 per cent as well as significant sovereign debt shocks RBS, HSBC, Lloyds and Barclays banks would keep a core tier-one ratio of at least 9.6 per cent.

The CEBS says the aggregate tier-one ratio under the adverse scenario would decrease from 10.3 per cent in 2009 to 9.2 per cent by the end of 2011. This result is reliant on 38 of the 91 banks continuing to receive governmental support.

In total, under the adverse scenario, European banks would lose a total of €566bn (£470bn).

The stress test focuses mainly on credit and market risks, including the exposures to European sovereign debt.

Fidelity strategic bond fund manager Ian Spreadbury says: “With the euro still under pressure and markets poised to strike southern Europe, it was always unlikely that the ECB would allow a major problem with the European banking system to be revealed in the tests but the failure of only seven banks and only €3.5bn of fresh capital needed to be raised by those banks suggests that the test methodology did not go far enough.

“While the announcement of the results has met with a muted response from markets, the more lasting issue may be that the tests may not have drawn the line in the sand that regulators had intended.”

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