July 15, 2011
Imagine a patient clutching at his heart, complaining of sharp chest pains. A doctor arrives, examines him carefully and pronounces him healthy—provided he is not having a cardiac arrest. The same air of unreality infects today’s stress-test results for European banks: most institutions are fine unless there is a sovereign-debt crisis.
The tests, which were conducted by the European Banking Authority (EBA), found that eight banks out of 90 tested had failed to pass the threshold of a core Tier-1 capital ratio of 5% under a stressed scenario. Five were Spanish, two were Greek and one was Austrian. Another sixteen banks posted ratios of between 5% and 6%, dangerously close to failure.
Despite some claims to the contrary, the tests are not a waste of time. All of the banks involved in the tests have to disclose lots of information about their sovereign-debt holdings, which will help analysts to identify the banks that are most exposed to the unfurling euro-area crisis. They may have helped encourage some banks to raise capital ahead of time: European institutions added around €50 billion ($71 billion) of capital between January and April of this year.
The eight banks that failed to meet the EBA’s pass threshold and those that floated just above it will come under pressure from the markets to raise equity. The task facing the Spanish banking system has been made clearer, in particular: five of the eight banks that failed were Spanish, and without the capital-raising in the first four months of the year, nine out of the 20 banks that would have failed were Spanish.
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