The European Bank Stress Tests are in. These are the results from 91 EU banks, which are 65% of the sector.
The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise.
The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital
support provided until 1 July 2010, which represents 1.2 percentage point of the
aggregate Tier 1 ratio.
As a result of the adverse scenario after a sovereign shock, 7 banks would see their
Tier 1 capital ratios fall below 6%.
The threshold of 6% is used as a benchmark solely for the purpose of this stress test
exercise. This threshold should by no means be interpreted as a regulatory minimum.
All banks that are supervised in the EU need to have at least a regulatory minimum of
4% Tier 1 capital.
The Wall Street Journal lists the banks who failed:
Germany's Hypo Real Estate Holding AG, ATEBank in Greece and five Spanish banks—Unnim, Diada, Espiga, Banca Civica and CajaSur—were the only institutions to fail the tests. Their combined shortfall would be about €3.5 billion.
These tests are supposed to determine which banks can survive another (read continuing) recession. Already bloggers, financial analysts and Mom & Dad around the kitchen table think the report is all smoke and mirrors. In other words, there was little stress in the tests to show how many banks really will fail.