Stress Tests Put Pressure on 24 European Banks to Raise Capital

2011-07-15

By Liam Vaughan, Gavin Finch and Ben Moshinsky

     July 16 (Bloomberg) -- As many as 24 European banks will be under pressure to show they can raise capital after failing, or barely passing, a second round of stress tests by regulators.

     Eight failed the European Banking Authority’s stress tests yesterday, with a combined shortfall of 2.5 billion euros ($3.5 billion). 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.

     “Six percent is the defacto pass-rate,” said Huw van Steenis, a banking analyst at Morgan Stanley in London. The result “puts pressure on national regulators to turn their attention to the banks which just passed.”

     The tests mark a clash between the European Union regulator and national counterparts over what counts as capital. The EBA is pushing banks to raise more and better capital to meet the Basel III guidelines and boost investor confidence in the industry amid the sovereign debt crisis. Both German and Spanish regulators said their banks have enough. German lenders criticized the “political” stress tests for excluding a kind of non-voting capital recognized by local regulators.

     “Neither the EBA’s 5 percent core capital hurdle, nor its decision on the composition of that capital, have legal equivalence,” the DSGV savings banks association said yesterday. “This is a case of high-handed measures being set to achieve political goals.”