Seven out of 91 banks fail EU stress tests (3rd Lead)

Jul 23, 2010, 18:36 GMT

London/Brussels - Seven European Union banks have failed the stress tests run by regulators on 91 lenders and will need to find extra funding on the markets or from governments, the Committee of European Banking Supervisors (CEBS) said Friday.

The stress tests have analysed whether banks could survive a further economic or sovereign-debt crisis. EU leaders insisted the results be made public in a bid to dispel market fears that the European banking system as a whole would need government rescues.

'As a result of the adverse scenario after a sovereign shock, seven banks would see their Tier 1 capital ratios fall below 6 per cent,' CEBS said in a press release as it announced the results.

Those seven banks are ATE of Greece; Hypo Real Estate (HRE) of Germany; and the Spanish banking groups Cajasur, Civica, Diada, Espiga and UNNIM, the London-based organization said.

Tier 1 capital is seen as the highest-grade capital a bank can hold. Supervisors had said that any bank whose ratio of Tier 1 capital to liabilities fell below 6 per cent would be counted as failing the tests.

That is the hypothetical threshold below which supervisors calculated that a bank would be unable to cover all its liabilities. The legal minimum ratio is 4 per cent.

Failed banks 'should take the necessary steps to reinforce their capital positions through private-sector means and by resorting, if necessary, to facilities set up by (EU) governments, in full compliance with EU state-aid rules,' CEBS, the European Central Bank (ECB) and the European Commission said in a joint statement.

Officials were quick to stress that the overall test result - in which just one bank out of every 13 failed - proved that the EU banking system as a whole is strong.

'The results of the test confirm the overall resilience of the EU banking system to negative macroeconomic and financial shocks, and are an important step forward in restoring market confidence,' the joint statement said.

The Bank of Spain took a similar line, saying that the tests 'confirm the solidity' of the country's financial sector, since the vast majority of the 27 banks tested passed.

Greece's ATE bank issued a statement saying that it had 'discussed in detail the stress test with Greece's central bank ... (and) will proceed to a capital increase to cover future capital needs.'

Reports said that the bank would seek more than 245 million euros (315 million dollars) with the help of the Greek government

HRE, meanwhile, said in a statement that the results were only of 'limited meaning,' stressing that the bank's Tier 1 capital ratio had not fallen below the legal limit of 4 per cent in any test.

HRE had asked for 10 billion euros in aid from the state rescue fund, SoFFin, but only been granted 7.87 billion euros, it said.

'With full recapitalization (by SoFFin), HRE would have exceeded a Tier 1 capital ratio of 6 per cent in all scenarios in the current tests,' the statement said.