Stress tests revealed Friday that eight out of the 90 European banks tested fell short of capital requirements for a total of 2.5 billion euros ($3.5 billion) combined. The results were not as damaging as had been feared, although a number of banks that passed will still have to improve their capital positions.
According to the European Banking Authority (EBA), banks were encouraged to increase their capital positions in the first four months of 2011 prior to the test. Still, eight banks fell short of the required 5% CT1 reserve, with another 16 squeaking by with reserves of between 5% and 6%.
The EBA further noted that such reserves were not adequate to guard against all eventualities in the current economic climate; therefore, it recommended "that national supervisory authorities request all banks whose CT1R is above but close to 5%, and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position. These would include, where necessary, restrictions on dividends, deleveraging, issuance of fresh capital or conversion of lower-quality instruments into Core Tier 1 capital."
According to a Bloomberg report, Huw van Steenis, a banking analyst at Morgan Stanley, said, “The market had very low expectations for the stress tests. But the EBA’s focus on the 16 banks which were on the cusp of failure, with capital of between 5% and 6%, is a step in the right direction. It’s a very cleverly worded document which puts pressure on national regulators to turn their attention to the banks which just passed.” Had they not raised capital during the first quarter, about 20 banks would have failed, according to the EBA.
Germany, however, was not pleased with the tests after one German bank withdrew itself in the wake of a decision by the EBA not to acknowledge that its capital level had improved. Reuters reported that the association of German savings banks termed the tests arbitrary and politically influenced. The Association of German Banks was equally incensed, calling the decision "not comprehensible."
Heinrich Haasis, head of the association of German savings banks, was quoted in the report saying, "The European stress test has not contributed toward building trust in a sufficient manner. Arbitrary benchmarks were applied to achieve political goals."