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Business News/ Industry / Banking/  Twenty-five banks fail ECB stress test, need to raise €25 billion
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Twenty-five banks fail ECB stress test, need to raise €25 billion

Of the 25 banks that failed the assessment, 12 have already covered their shortfalls in the year to 30 September, the central bank said

The two-part exam, comprising an Asset-Quality Review of balance sheets as of 31 December 2013, and a stress test, forms one pillar of the European Central Bank’s drive to move the euro zone forward. Photo: BloombergPremium
The two-part exam, comprising an Asset-Quality Review of balance sheets as of 31 December 2013, and a stress test, forms one pillar of the European Central Bank’s drive to move the euro zone forward. Photo: Bloomberg

Frankfurt: Twenty-five banks in the euro area will need to raise €25 billion (over 1.9 trillion) of fresh capital, after the European Central Bank (ECB) probed their balance sheets and subjected them to a stress test.

Of the 25 banks that failed the assessment, 12 have already covered their shortfalls in the year to 30 September, the ECB said.

“This unprecedented, in-depth review of the largest banks’ positions will boost public confidence in the banking sector," ECB vice-president Vitor Constancio said in a statement on Sunday, upon the release of the results of the year-long Comprehensive Assessment of 130 euro-area lenders. “This should facilitate more lending in Europe, which will help economic growth."

The two-part exam, comprising an Asset-Quality Review of balance sheets as of 31 December 2013, and a stress test, forms one pillar of the ECB’s drive to move the euro zone forward after half a decade of financial turmoil by making its impact on the banking system transparent. Banks will have from six to nine months to fill the gaps and have been urged to tap financial markets first.

The ECB’s stress test was conducted in tandem with the London-based European Banking Authority (EBA), which also released results on Sunday. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.

“The Comprehensive Assessment allowed us to compare banks across borders and business models," ECB Supervisory Board chair Daniele Nouy said in the statement. “The findings will enable us to draw insights and conclusions for supervision going forward."

Bad loans

The ECB said lenders will need to adjust their asset valuations by €48 billion, taking into account the reclassification of an extra €136 billion of loans as non- performing. The stock of bad loans in the euro-area banking system now stands at 879 billion euros, the report said.

Italian banks will have to implement the largest asset-value adjustments according to the findings of the review, equivalent to €12 billion. Greek banks will have to revalue by €7.6 billion, and German banks by €6.7 billion, the report showed.

Italian lenders were buffeted by the stress test, suffering a hit to capital of €35.5 billion, followed by French banks with €30.8 billion. German banks would see capital reduced by €27 billion in the stress scenario, the report said.

Under the simulated recession set out in the assessment’s stress test, banks’ common equity Tier 1 capital would be depleted by €263 billion, or by 4 percentage points. The median CET1 ratio—a key measure of financial strength—would therefore fall to 8.3% from 12.4%.

Nouy has said banks will be required to cover any capital shortfalls revealed by the assessment, “primarily from private sources."

Nouy and Constancio were scheduled to give a press conference at 12.30pm in Frankfurt to explain the results. Bloomberg

Jana Randow, Stefan Riecher, Nicholas Comfort and Alessandro Speciale in Frankfurt contributed to this story.

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Published: 26 Oct 2014, 05:09 PM IST
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