8 banks flunk controversial European stress test

By David Mchugh And Gabriele Steinhauser

Associated Press

Published: Friday, July 15 2011 8:36 p.m. MDT

Customers of National Bank of Greece, right, and Alpha Bank, left, enter the branches of the two biggest banks of the country in Athens, Friday, July 15, 2011. Ninety European banks get their test results back Friday, as regulators seek to increase transparency and convince the markets that the global financial system can withstand big shocks like a possible Greek debt default. Greece's finance minister Evangelos Venizelos on Thursday downplayed the implications of a "selective default" rating being slapped on the debt-ridden country after an expected second bailout.

Thanassis Stavrakis, Associated Press

FRANKFURT, Germany — Eight of 90 European banks flunked stress tests projecting how they would fare in another recession, and 16 more barely passed — but analysts doubted Friday's results would succeed in restoring confidence in the continent's shaky financial sector.

Some countries challenged the results as inaccurate and overly pessimistic, saying they would not force their weaker banks to raise new cash. Economists warned that the tests were insufficient because they did not simulate the main risk hanging over Europe, a default by Greece.

While markets were sanguine about the results — the euro barely moved — experts questioned whether the tests achieved their goal: restoring confidence in a sector that is carrying billions of bad debt from crisis-hit countries like Greece, Ireland and Portugal.

"The publication of these results will not assuage investors' fears over the resilience of the EU banking sector," said Marie Diron, senior economic adviser for Ernst & Young.

She said the tests were useful to single out particularly weak banks, but noted that a national debt default was "the single greatest risk facing the European banking sector at present."

As it presented the results, the European Banking Authority said the failing banks should quickly raise a total of (euro) 2.5 billion ($3.5 billion) to boost their capital cushions. The banks that barely passed were also asked to shore up their finances in coming months.

Spain, commonly seen as the next-weakest link in the 17-country eurozone, fared by far the worst in the tests. Five banks — Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Group Caja3 — failed the test outright, while seven others barely scraped by. However, the number of banks that Spain tested was far higher than in all other countries.

The next in line was Greece, with two lenders — EFG Eurobank and government-owned ATEBank — flunking the tests and two others almost failing.

Austria's Oesterreichische Volksbank AG was the only lender outside the crisis countries to not pass, though German Landesbank Helaba pulled out of the tests earlier this week, saying the EBA refused to take into account some of the capital it had set aside.

The European banking regulator's decision to not count certain types of capital for its stress scenarios has come under fire from several countries and could become a major hurdle for the tests' credibility.

"I refuse to accept that the five failed the test," Bank of Spain Governor Miguel Angel Fernandez Ordonez said Friday night, insisting that none of the Spanish banks had to raise extra funds.

He complained that the EBA had refused to count general provisions, money that Spanish banks are required to set aside for a crisis such as the one envisioned in the stress tests.

German officials also questioned the tests' results, saying they saw no reason for any of their banks to take action, even though two — HSH Nordbank AG and Norddeutsche Landesbank — fell into the "barely passed" category.

Nordbank and Norddeutsche Landesbank both challenged the stress test results, saying they didn't reflect how strong they were.

The EBA lacks the power to force banks to raise more capital — whether from investors or governments — or to make them merge or sell businesses. Only their national governments can do that, and analysts say the key to the stress tests is whether governments act on the results.

"The real test of the process, and of the strength of the new European supervisory system, will be the willingness of individual regulators to follow up," said Bob Penn, a partner at commercial law firm Allen & Overy.

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