Stressed European Banks

It’s been a bad day if you’re a European bank in a vulnerable financial position.

The European Banking Authority has announced the results of its financial stress tests, with a whopping 24 European banks failing.

This means the banks which failed the stress tests need to improve their financial positions within the next nine months or face being shut down.

The good news is no UK banks failed the stress test.

Of the four UK banks which were subjected to the stress test, Lloyds Banking Group passed by the narrowest margin, with capital under adverse scenarios of 6.2%. This is pretty close to the 5.5% benchmark used by the European Banking Authority.

Across the rest of Europe, the position of the banking scenario is less rosy.

Four Italian banks, two Greek banks, two Belgian banks and two Slovenian banks failed the stress test, which was based on their balance sheet positions at the end of 2013.

Worst affected was Monte dei Paschi, an Italian bank, with a capital shortfall of €2.1bn (£1.65bn).

Quick off the blocks with fund manager commentary was Paras Anand, Head of European Equities at Fidelity Worldwide Investment:

“Arguably the most remarkable aspect of the recent in-depth review of the capital adequacy of the European banking system is how little commentary the event garnered before the publication if the results.

“That 25 of Europe’s 130 largest banks would require more capital in a stressed economic scenario is truthfully a much more robust place to be in than many would have anticipated two years ago where concerns around the fragility of the Eurozone was at its peak.

“Since then we have seen a collapse in funding costs, an improvement in net interest margins and in some economies, indications that historic provisions on ‘toxic’ assets may, in the end be shown to be overly prudent.

“Several quarters of deleveraging means that the system is less tightly coupled than it was in the period around the crisis and certainly the chance of cross-border contagion is reduced as a result of how ECB liquidity has been used to by local central banks to shore up their domestic sectors.

“The challenge faced by the sector going forward is the same as we see across developed markets. Until the overlap between the customers that require credit and those to whom the banks are willing to lend grows materially, it will be challenging for the financial system to play the role that it has done historically in supporting economic recovery.

“Greater credibility in terms of capital adequacy is a step in the right direction, as may be establishing a consistent regulatory framework, but both the management of banks and those that regulate them need to stop looking back and start looking forward in order to push the Eurozone economy in the right direction.”

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