ECB fails 25 banks in landmark review | Business| Economy and finance news from a German perspective | DW | 26.10.2014
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ECB fails 25 banks in landmark review

Twenty-five European banks have failed an in-depth review of their balance sheets but most have already taken remedial action. Italian, Cypriot and Greek banks were found to have the biggest shortfalls.

Thirteen banks in the eurozone still do not have enough capital on hand to withstand another financial crisis, the European Central Bank (ECB) said Sunday as it announced the results of an unprecedented check into the financial health of 130 banks in the eurozone.

The ECB said 25 banks had actually failed its two-part review as of December 31 last year, but that 12 had reinforced their capital buffers since then.

The remaining 13 must come up with an additional 10 billion euros ($12.6 billion) to protect themselves against potential losses, and they have two weeks to submit a plan to the ECB on how they intend to do so.

The test provided a rosier-than-expected snapshot of the eurozone economy seven years after the Continent's sovereign debt crisis crippled a number of countries' economies and nearly plunged some into bankruptcy.

Some countries fared better than others. The biggest shortfalls were found in Italy, Cyprus and Greece, and the bank with the largest capital hole to fill was Italy's Monte dei Paschi di Siena, which came up 2.11 billion euros short.

Of the 24 German lenders that were examined, only one - MünchenerHyp - did not meet all of the ECB's requirements but has since rectified that.

There were also three Greek banks that missed the mark, plus three from Cyprus, two each from Belgium and Slovenia, and one each from France, Austria, Ireland and Portugal.

The ECB's audit was meant to revive confidence in the strength of the bloc's flagging economy before the bank takes over as the euro currency bloc's banking supervisor on Nov. 4.

Preventing credit crunch

The central bank hoped the assessment would help it foresee any hidden problems in the system and preempt another financial meltdown in which national governments had to step in and bailout major banks.

It also intended to loosen the flow of credit to companies, especially small and medium-sized ones that turn to banks when they need money.

"The results guarantee that going forward the economic recovery will not be hampered by credit supply restrictions," said ECB Vice President Vitor Constancio.

But one issue that remains is ensuring that there is a demand for credit in the first place as the eurozone economy grinds to a virtual halt. The 18-member bloc showed no growth in the second quarter, after four quarters of only modest recovery.

"I consider the stress test as an important partial success, which will help reduce uncertainty," said Marcel Fratzscher, president of Germany's DIW economic institute.

"However, important challenges remain unsolved. The stress test alone will not end the credit crunch for small and mid-sized companies in Southern Europe," Fratzscher added, underscoring dependence by many banks on cheap credit from the ECB.

High-risk loans

The tests put many banks in an uncomfortable situation when it revised the amount of their risky loans from 136 billion euros to 879 billion euros. At the end of last year, the ECB found that banks had a shortfall of 25 billion euros.

Part one of the test, the Asset-Quality Review, looked at the asset side of banks' balance sheets as of December 31, 2013. A passing grade meant a bank's common equity Tier 1 capital equaled at least 8 percent of risk-weighted assets. For part two, the adverse stress test, that capital had to equal at least 5 percent.

The ECB staked a great deal on the audit, as two previous reviews of European banks cleared some institutions that later failed.

Another stress test carried out by the European Banking Authority (EBA) for European banks outside the eurozone revealed that no banks in Britain, Denmark, Sweden, Norway, Hungary or Poland had insufficient capital.

cjc/sb (Reuters, AP, dpa)