European banks may have to raise as much as 80 billion euros ($113 billion) of additional capital as the stress tests failed to allay investor concern about a Greek default and governments? ability to bail out their lenders.
The eight banks that failed out of the 90 tested on July 15 had only a combined capital shortfall of 2.5 billion euros, the European Banking Authority said July 15. As many as 20 banks need to bolster capital, JPMorgan Cazenove analysts led by Kian Abouhossein wrote in a report after the results were published.
Regulators didn?t include a Greek default in the tests even though credit default swaps indicate investors see an almost 90 percent chance of one. The EBA included a 25 percent writedown on 10-year Greek government bonds held in banks? trading books even as the securities trade at about 51 cents on the euro. The exams won?t succeed in reassuring investors until governments put in place a mechanism to stop failing banks weighing on public funds, said Gary Greenwood, an analyst at Shore Capital.
?The EBA are stress-testing the wrong thing,? said Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London in a telephone interview. ?They need to be testing the ability of the euro zone to support its banks. It?s firstly a question of the ability of the sovereign to bail out the banks, and then who is going to bail out the sovereign.?
The 46-member Bloomberg Europe Banks and Financial Services Index has slumped 12 percent this year as the debt crisis worsened. The index fell 0.3 percent at 8:14 a.m. today.
?We think the European banking stress test is unlikely to provide much in terms of assurance to the markets,? said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in a note to clients today. ?The concerns about contagion of the sovereign debt crisis into core Europe have taken center stage.?
Euro-area government leaders will hold a special summit on July 21, stepping up efforts to stem the contagion from Greece. Leaders are at odds with one another and with the European Central Bank over demands by Germany and Finland that private investors bear some of the burden for a second Greek bailout.
Yields on two-year notes from Ireland, Portugal and Greece soared to euro-era records last week. Yields on Spanish and Italian 10-year bonds surged to the most since the euro?s inception in 1999.
?You should probably be stress-testing the sovereigns not the banks,? said Liverpool, England-based Greenwood. ?The only thing that can ultimately give the markets some comfort is evidence that the sovereigns themselves have sorted out their balance sheets.?
Allied Irish Banks Plc (ALBK) and Bank of Ireland Plc passed the EU?s examinations in 2010, while Anglo Irish Bank Corp. wasn?t tested. Later that year, a liquidity shortfall caused when depositors withdrew funds from Irish lenders helped prompt EU governments and the International Monetary Fund to agree on an 85 billion-euro bailout for the country.
Greece?s EFG Eurobank Ergasias SA (EUROB) and Agricultural Bank of Greece (ATE) SA, Austria?s Oesterreichische Volksbanken AG (VBPS) and Spain?s Banco Pastor SA (PAS), Caja de Ahorros del Mediterraneo (CAM), Banco Grupo Caja3, CatalunyaCaixa and Unnim failed this year?s tests. As many as 16 more will need to bolster capital after their core Tier 1 ratio dropped below 6 percent, little more than the assessment?s 5 percent pass-mark, the EBA said.
Rating company Standard