Seven banks fail Europe test, credibility questioned

LONDON/MADRID,  (Reuters) – Just seven European banks  failed a health check and were ordered to raise their capital by  3.5 billion euros ($4.5 billion), much less than expected,  confirming fears the continent’s long-awaited stress test was too  soft.

Results of the test of how 91 banks in 20 countries would cope  with another recession was released yesterday in a bid to restore  investor confidence after the Greek debt crisis spooked markets  earlier this year. But it fell on deaf ears.

“There is little evidence that the tests have been applied  consistently and there is a distinct lack of credibility, making  this a wasted opportunity,” said Richard Cranfield at  international law firm Allen & Overy.

While the modest findings cast doubt on the credibility of the  bank tests, some analysts said that may not matter because the  European economy is improving fast.

The survey also showed how much government bonds are marked  down on bank books, with Greek debt discounted the most, at 23  percent.

Analysts had expected five to 10 banks to fail the test, but  estimated the capital shortfall could be over 30 billion euros. As  expected, no big banks failed the health check.

“I see nothing stressful about this test. It’s like sending  the banks away for a weekend of R&R,” said Stephen Pope, chief  global equity strategist at Cantor Fitzgerald.

The Committee of European Bank Supervisors (CEBS), a  previously little known group with 25 staff at a small London  office, which coordinated the process, said its test was more  severe than the U.S. one.

“With this undertaking, the EU has made a significant effort  to increase disclosure on the conditions of individual European  financial institutions and enhance market stability,” said U.S.  Treasury Secretary Timothy Geithner, who had pushed Europeans to  do their own tests.

A health check on U.S. banks last year helped restore investor  confidence and underpinned a recovery by bank shares. Five of Spain’s smaller regional lenders, known as cajas,  failed the test. Their recapitalisation will almost complete a  state-funded drive to consolidate the country’s network of  unlisted savings banks.

They need 1.8 billion euros, the Bank of Spain said.

Banks in Germany and Greece were also seen as weak spots and  in need of restructuring, but state-owned Hypo Real Estate was the  only German lender to flunk and state-controlled ATEbank the only  Greek one.

The euro ended flat against the dollar after falling initially  on questions whether the stress tests were tough enough. German  government bond futures fell on relief that they threw up no nasty  surprises.

European bank shares, up on the week, closed before the  results were announced. U.S. stocks were little changed after the  stress test and closed higher on U.S. company results. The cost of  insuring the debt of most European banks fell.

“Despite questions about transparency and how the Euro  stress tests don’t measure up to the U.S. tests last year, I  think these tests will start to put these euro zone concerns  behind us,” said Chris Rupkey, chief financial economist at Bank  of Tokyo/Mitsubishi UFJ in New York.

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