Failing the stress test

The results of a ‘stress test’ by the European Banking Authority on ninety European banks were revealed at the end of last week, with eight banks failing the financial health check.

No UK banks failed the stress tests on this occasion, suggesting that banks in the UK have done a reasonably good job of repairing their balance sheets following the global financial crisis.

Of the eight which failed the stress tests, five are Spanish. Two Austrian banks and one Greek bank also failed their stress tests.

Failing the stress test means that the eight banks had a core tier one ratio, an important measure of financial robustness, below 5% over a two year time horizon.

In addition to the eight banks which failed the tests, another sixteen banks fell into a ‘danger zone’, with a tier one ratio of between 5% and 6%.

The markets have fallen again this morning, although this is likely to be in response to a worsening economic outlook in Italy rather than specifically due to the results of this stress test.

One thing is for sure; the European banking sector still has some way to go before it can be considered financially healthy.

Some banks will need further assistance from the state to restore their capital positions and many would be badly hit should we see defaults in Greece and other peripheral eurozone economies.

Photo credit: Flickr/bottled_void