EU Economy
Eight banks failed European stress tests; 3 Irish banks passed
By Finfacts Team
Jul 15, 2011 - 5:00 PM

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The Deutsche Bank towers in Frankfurt, seen through artist Max Bill's statue Continuity - - Durch die Statue 'Kontinuität' von Max Bill

The European Banking Authority (EBA) published today the results of its 2011 European Union-wide stress test of 90 banks in 21 countries - - accounting for over 65% of the EU banking system total assets. The aim of the 2011 EU-wide stress test is to assess the resilience of the banks involved in the exercise against an adverse but plausible scenario. Eight banks failed the stress tests while the 3 Irish domestic banks passed.

Last July, a similar exercise met with wide skepticism.

Spain has the largest number of failures, with 5 banks dropping beneath the 5% Core Tier 1 Ratio (CT1R) threshold, the EBA said. Another seven Spanish lenders just scraped through with between 5% and 6%.

Two Greek banks and one Austrian bank also flunked the tests, the EBA said. In addition to Spain, the countries with banks that almost failed are Cyprus (1 bank), Germany (2), Greece (2), Italy (1), Portugal (2) and Slovenia (2).

In Ireland, all three of the tested banks easily passed the tests.

For the 2011 exercise, the EBA allowed specific capital increases in the first four months of 2011 to be considered in the results. Banks were therefore incentivised to strengthen their capital positions ahead of the stress test.

The 2011 EU-wide stress test results show that:

  • At the end of 2010, twenty banks would fall below the 5% Core Tier 1 Ratio (CT1R) threshold over the two-year horizon of the exercise. The overall shortfall would total €26.8bn.
  • Between January and April 2011, a further net amount of some € 50bn of capital was raised.
  • Taking into account these capital raising actions implemented by end April 2011
  • Eight banks fall below the capital threshold of 5% CT1R over the two-year time horizon, with an overall CT1 shortfall of €2.5 bn.
  • Sixteen banks display a CT1R of between 5% and 6%.

On the basis of these results, the EBA has also issued its first formal recommendation stating that national supervisory authorities should require banks whose CT1R falls below the 5% threshold to promptly remedy their capital shortfall. The EBA notes that this is not sufficient to address all potential vulnerabilities at this point. Therefore, the EBA has also recommended that national supervisory authorities request all banks whose CT1R is above but close to 5%, and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position. These would include, where necessary, restrictions on dividends, deleveraging, issuance of fresh capital or conversion of lower-quality instruments into Core Tier 1 capital.

The EBA will monitor the implementation of these recommendations and produce progress reports in February and July 2012.

The 2011 EU-wide stress test provides an unprecedented level of transparency on banks’ exposures and capital composition to allow investors, analysts and other market participants to develop an informed view on the resilience of the EU banking sector.

Following on the observation of inconsistencies in the treatment of sovereign debt last year, the EBA issued new guidance during the peer review phase. Specific guidance was given regarding the computation of provisions for sovereign exposures in the banking book.

The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at €98.2bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is €52.7bn for Ireland (61% held domestically) and €43.2bn (63% held domestically) for Portugal. Importantly, EAD exposures are different from similar exposures reported on a gross basis in the disclosure templates.

The Central Bank of Ireland today published the results of the European Banking Authority (EBA) stress tests on Allied Irish Bank (AIB), Bank of Ireland and Irish Life and Permanent (IL&P).

The Bank said the results of the tests show that the Irish banks meet the stress requirements and do not require additional capital beyond the requirement set in the Financial Measures Programme published in March 2011. The results of the EBA stress tests take account of the recapitalisation measures announced following the Prudential Capital Assessment Review (PCAR), which required the banks to raise an additional €24bn to in order to achieve a core tier 1 ratio of 6% at the end of 2013 in a stressed scenario.


Pre 2011 Recapitalisation

Stressed Case Core Tier 1 at Dec-2012

Post 2011 Recapitalisation

Stressed Case Core Tier 1 at Dec-2012
 Bank of Ireland  4%  7.1%
 AIB  -4.5%  10.0%
 IL&P  -4.4%  20.0%

View results for Allied Irish Banks plc

View results for Bank of Ireland

View results for Irish Life & Permanent plc

Stress Test Summary: European Banking Authority report

Additional guidance to the methodological note

Bloomberg reports that the European Union plans to force banks to disclose how they fare in future stress tests to prevent any repeat of the last-minute withdrawal of Germany’s Landesbank Hessen-Thueringen from this year’s exams.

Michel Barnier, the EU’s financial services chief, is seeking to empower national regulators and the €opean Banking Authority to override professional secrecy rules so that they can publish stress test data, according to a draft of the plans seen by Bloomberg News. Under existing law, the banks retain ownership of the information and decide what may be published.

Professional secrecy rules “shall not prevent” regulators from publishing the outcome of stress tests, the document says. Authorities should also be allowed to transfer the data to the EBA for publication, it says.

Bloomberg said Landesbank Hessen-Thueringen, known as Helaba, refused to allow the EBA to release its stress-test data on July 13th in a dispute over the regulator’s measurement of Core Tier 1 capital, the gauge by which banks are said to have passed or failed the exercise. The bank said it was “incomprehensible” for the EBA to exclude instruments that German regulators counted toward lenders’ reserves.

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