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Tuesday, October 28, 2014

Relatively small number of European banks fail stress test

Although 25 of 130 lenders subject to the European Central Bank (ECB) stress test failed, the Eurogroup president Jeroen Dijsselbloem maintained that the test shows that the banking crisis in the region is already in the past.



Dijsselboem, who is also minister of finance of the Netherlands, said: “I definitely think the banking crisis is behind us. I am never free of worry, so I do feel that banks have to keep on working managing their risks, strengthening their capital ratios where necessary also in the future.” Although there was a total shortfall of about $32 billion many banks had already taken steps to cover that amount this year. Dijsselboem said that the numbers were manageable.
A Bloomberg article gives details of the banks that failed the test. Nine of them were in Italy. The banks were concentrated in areas such as Greece and Cyprus, with the latter country the site of the worst performing bank. Italy, Greece, and Cyprus have all faced financial difficulties.
 The ECB will become the supervisor of regional banks on November 4. Dijsselbloem said that the success of banks in going to capital markets will lead investors once again to invest in European banks and that the stress results will support this trend.
Another article claims that only 13 of the big Eurozone banks were "sick". While analysts predicted that financial markets would be relieved at the results, some analysts were concerned that the stress test was not tough enough despite the claim by the ECB that the assessments were quite rigorous. The test results are not likely to force the closure of any banks. Those judged to have too little capital will have two weeks to draft plans to increase their capital and up to nine months to meet the minimum requirement.
While the tests showed that 25 banks in all failed the test, a dozen of those banks had already rectified their situation.These banks raised capital by issuing new shares, or sold risky investments or loan businesses and thus reduced the amount of capital needed. Neil Williamson of Aberdeen Asset Management said: “Generally speaking, the absolute number that needs to be raised is not large. There are still plenty of question marks about some banks.”
 Monte dei Paschi di Siena in Italy, the world's oldest bank had the largest capital deficit. The bank already received a government bailout. There is speculation that the bank would seek a purchaser. The board of the bank has hired UBS and Citigroup as advisers to define a plan to solve the bank's problems.
  Martin Baccardix, a financial analysts said: " From these tests we can hope that banks will trust one another and that there would be transparency. What is more important to see going into 2015 is whether the banks are going to be prepared to lend more money to business to create more money in an economy that has been flat for several quarters and is threatening to turn back into recession. If that can be held off, then the ECB will be able to look at this test as an incredible success to engender confidence - [which is] everything in the banking system, no less so than here in Europe."
 In 2010 and 2011 similar reviews passed some banks that later had to receive bailouts. Many analysts considered that national supervisors of regional banks were too easy on their banks and unwilling to deal with problems. With the ECB taking over supervision this problem may be solved. However, this also will involve less national control over financial institutions.

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