Italy fares worst as 25 major euro zone banks fail ECB health test
Analysts warn that capital shortfall fixes won't guarantee more bank lending to boost economy
Twenty-five of the euro zone's 130 biggest banks have failed a landmark health check and ended last year with a collective capital shortfall of €25 billion (HK$243 billion), the European Central Bank said yesterday.
A dozen of those banks have already addressed the gap by raising €15 billion over the course of this year.
Italy's financial sector faces the biggest challenge with nine of its banks failing the test, according to the European Banking Authority, which coordinated the stress test with the ECB.
The EBA said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also fallen short as of the end of last year.
The ECB has spent the last year reviewing the leading banks' assets and subjecting them to rigorous stress tests - an exercise aimed at flushing out any problems before it begins supervising the sector from November 4.
The ECB's pass mark was for banks to have high-quality capital of at least 8 per cent of their risk-weighted assets in the most likely economic situation for the next three years, and capital of at least 5.5 per cent under a bleaker scenario.
Banks with a capital shortfall will have to say within two weeks how they intend to close the gap. They will then be given up to nine months to do so.
The EBA required 123 lenders from across the EU to submit to theoretical shocks such as a three-year recession and said 24 flunked in total. The ECB's test included a higher number in the euro zone as it also included subsidiaries of big banks.
The ECB has staked its reputation on delivering an independent assessment of euro zone banks in an attempt to draw a line under years of financial and economic strife in the bloc.
But there is no certainty that bank lending will now pick up as the ECB hopes, to breathe life into a moribund euro zone economy.
"Thinking that lending somehow can lead GDP is an illusion, and I don't know how that has somehow crept into the policy debate," said Erik Nielsen, global chief economist at Unicredit, adding that external demand growth is no longer there.
Those lenders with overvalued assets will have to hold more capital eventually, leaving less room to expand, lend or pay dividends. For lending though, the fundamental question is whether the demand for credit is there.
