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.