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Banks under inspection

July 23, 2010

Germany's Hypo Real Estate bank has failed the so-called stress test to see if it could survive a future financial crisis. The picture for the rest of Germany's banking sector is more positive.

Frankfurt skyline
The results were good for most German banksImage: picture-alliance/dpa

Germany's Hypo Real Estate bank has failed a "stress test" designed to see if it would survive another global economic crisis, as Europe aims to restore confidence to its banking sector.

The news in other parts of the German banking sector was more positive with clean bills of health for Deutsche Bank, Postbank, Commerzbank and all of the country's seven Landesbanken, or regional banks.

"The German banking system has shown itself to be robust and proved its resilience even under very pessimistic assumptions," a statement by the German Central Bank and Financial Sector Stabilization Fund (SoFFin) said Friday.

The tests, to see how banks would fare under worsening economic circumstances, were aimed at boosting investor confidence in the eurozone.

While the majority of banks in Europe passed the test, Germany's Hypo Real Estate failed to show that it would emerge from a severe economic crisis with a sufficient amount of core capital. The bank was nationalized following its collapse in 2008.

However, SoFFin said that Hypo Real was "currently undergoing a far-reaching restructuring process under the close surveillance of its sole owner, the Financial Sector Stabilization Fund."

The results as a whole were welcomed by German Finance Minister Wolfgang Schaeuble.

"The broad participation in the stress tests and the publication of the results is an important step towards more trust in the markets," he said. "Transparency regarding the resistance capacity of the European banks has therefore clearly risen," he said.

Seven banks fail

Hypo Real Estate sign with arrow pointing down
The result was bad for Hypo, but changes are taking placeImage: AP

Seven out of 91 European banks failed the stress tests and show an overall capital shortfall of 3.5 billion euros ($4.5 billion), the organizers of the tests said on Friday.

Five of the failing financial institutions - Cajasur, Banca Civica, Diada, Espiga and Unnim - were Spanish. Greece's ATE bank also failed to make the grade.

The seven banks failed because the ratio of their core "tier one" capital - the strictest test of a bank's equity - would fall below 6 percent under the worst economic conditions set by the test.

Several other banks came close to failing the test, including Postbank and Nord LB, with a tier one ration of less than 7 percent under the most stressed scenario.

This prompted Gerhard Schick, finance spokesman for the Green party, to comment on Saturday that "the German banks are and remain shaky" despite being cleared by the test.

Economists pointed out that many of the German, Greek, Spanish and Irish banks to pass the stress test had already received support funds, or were in the process of doing so, ahead of the test - possibly preemptively to help them pass.

The International Monetary Fund welcomed the publication of the results, which it said would reassure markets.

German banks, several of which struggled during the financial crisis, had earlier been expected "all in all" to perform well, according to Manfred Weber, the head of the Association of German Banks.

Author: Richard Connor (Reuters/AFP/dpa)

Editor: Susan Houlton

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