Stress Tests Show Banks' Strength, Weren't Too Soft, EU Policy Makers Say
By Christian Vits and Simon Kennedy - Jul 23, 2010
European policy makers said the results of bank stress tests highlight the strength of their financial systems and rejected criticism the probes were too soft as 92 percent of the lenders passed.
“The French banking system once again shows its capacity to resist crises,” Bank of France Governor Christian Noyer said yesterday after the four largest French banks were ruled to have enough capital to outlast an economic slump and sovereign debt crisis. In Germany, where Hypo Real Estate Holding AG was the only one of 14 banks to fail the test, the Bundesbank and financial regulator BaFin said the “banking system has shown itself to be robust and proved its resilience.”
Finance chiefs carried out health checks of 91 banks in a bid to reassure investors about the state of financial institutions after the public-debt crisis pummeled the bonds of Greece, Spain and Portugal. The seven banks said to have insufficient reserves faced a combined capital shortfall of 3.4 billion euros ($4.4 billion), raising concern the evaluations weren’t strict enough.
The European Central Bank said banks that failed need to raise fresh capital or resort to government aid. It said the study “represents an important step forward in supporting the stability of the EU and euro-area banking sectors” and called the criteria “substantially adverse in macroeconomic and financial terms.”
The “exercise is an important contribution to bolstering confidence in the European banking system and strengthening the resilience and robustness of the global financial system,” Financial Stability Board Chairman Mario Draghi said in a statement. “The results provide additional clarity and transparency on the strength of the European banking sector.”
Capital Plan
In Greece, where the public-debt turmoil started at the end of last year, Finance Minister George Papaconstantinou said Agricultural Bank of Greece SA, the state-controlled lender that failed the test, will be required to present a plan to bolster capital by the end of the year and that the government would help if investors wouldn’t. The bank said it will proceed with a share-capital increase.
“The results are positive and show that the Greek banking system can cope even in conditions far worse than the present,” he said.
Spanish Finance Minister Elena Salgado said there is no “urgency” for the five Spanish lenders that fell short in the tests to raise new capital. Italy renewed an offer to buy bonds from lenders that need to raise capital after Monte dei Paschi di Siena SpA passed a stress test with a capital buffer of less than 235 million euros.
Traded Bonds
The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to the Committee of European Banking Supervisors, which coordinated the initiative. That means the tests ignored the majority of banks’ holdings of sovereign debt, investors said. They also didn’t allow for a country defaulting.
Bank of Italy Deputy General Director Anna Maria Tarantola said she was confident the results would “put an end to the rumors and uncertainty that has formed in the market, and create a climate of confidence.” ECB Vice President Vitor Constancio called the tests “severe” and explained they didn’t include a scenario of a national default because “we don’t believe there will be a default.”
Former Bank of England policy maker David Blanchflower said the criteria suggest a “relatively loose stress test.”
“It strikes me that the scenarios being tested aren’t particularly tough,” Blanchflower said. “What if it’s much worse than that? There are too many questions and it doesn’t look that convincing.”
To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net
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