Institute for International Economics
June 19, 2011
Eight European Union (EU) banks failed and 16 "sort of failed" the EU latest stress tests. As a result, the eight must promptly raise an aggregate of about €2.5 billion in core tier 1 capital. For the 16 others, with core tier 1 capital between 5 percent and 6 percent and sizeable exposures to sovereigns under stress, the European Banking Authority (EBA) requests that national supervisors take steps to make them strengthen their capital position1.
The eight failed banks came from Spain (5 – Grup Caja, Unnim, Banco Pastor, CAM, CatalunyaCaixa); Greece (2 – EFG Eurobank Ergasias, ATEbank); and Austria (Oesterreichische Volksbanken). One German bank (Landesbank Hessen-Thueringen) withdrew from the stress tests earlier in the week upon being told that it had failed. Meanwhile, the "sort of failed" banks included banks from Cyprus (1), Germany (2), Greece (2), Italy (1), Portugal (2), Slovenia (1), and Spain (7).
The next step must now be for EU authorities to live up to their fighting words "to address decisively any remaining pockets of vulnerability in the EU banking sector2." To that end they need to swiftly implement the recapitalization of, not just the eight banks that failed, but the 16 that almost did. Regrettably, this seems quite unlikely to happen.3 The European banking crisis will thus continue to be only gradually addressed as part of the rolling and slow-moving recapitalization of the system that began after the financial crisis hit in 2008. While clearly tougher than in 2010, Europe’s 2011 "Goldilocks stress tests"—not too tough but not too easy—will not constitute a decisive solution to the continent’s crisis of undercapitalized banks.
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