July 15, 2011

European Bank Stress Tests Expected to Show 10 Banks Could Fail

Additional capital needed to endure long recession

Stress tests, scheduled to be revealed after European markets close on Friday, that were conducted on 90 European banks are expected to show that 10 of those banks would need more capital if they were to make it through an extended recession. Some of those banks were already working to build their reserves, despite the fact that the action comes too late to affect the test results.

Reuters reported that the International Monetary Fund (IMF) was critical of recapitalization done to bolster European banks, saying that it was taking too long to boost capital and that the U.S. had done more since the beginning of the financial crisis to strengthen its banks.

Although the move will not better its results, Volksbanken in Austria, one of the banks said to have failed, sold its eastern European division to Sberbank of Russia on Thursday, reportedly for approximately 590 million euros ($835 million). EFG Eurobank of Greece announced that talks were underway regarding the sale of a majority stake in its Turkish unit Eurobank Tekfen.

Many expectations are that between five  and 15 banks will not pass the tests, which are the third and most stringent round since the beginning of the financial crisis. Any banks that do not make it through will be expected to provide firm plans by September to make good any deficits, including potential use of taxpayer money to do so. Reuters’ sources within the euro zone, however, put the number a bit higher, at 10-15 banks. Problems are expected in Greece, Spain, Portugal, and Germany. One German bank and two Spanish banks have already complained that the test is too strict, with the German bank withdrawing itself from testing.

Nils Melngailis, managing director at restructuring advisor Alvarez & Marsal, said in the report, "It is action rather than analysis that is important. The regulators and the banks already know who the weaker players are. The stress tests can confirm that, but they will have no teeth unless followed up by restructuring and consolidation of the financial landscape."

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