13 European banks fall short of passing cash test

HQ of the Monte dei Paschi di Siena bank, which failed the test. Picture: Reuters.
HQ of the Monte dei Paschi di Siena bank, which failed the test. Picture: Reuters.
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THE European Central Bank (ECB) said yesterday that 13 of Europe’s 130 biggest banks had failed an in-depth review of their finances and need an extra €10 billion (£7.9bn) to cushion themselves against any future crises.

ECB officials said the test had been tougher than similar reviews in 2011 and 2010, which gave a pass to banks that later needed bailouts.

They argued the review ensures banks, some of which have been reluctant to offer credit because they were nursing bad investments, will be ready to lend when the European economy finally picks up.

Yet after months of talk about banks that were “zombies” – walking dead, too weak to lend – it appeared unlikely that any would be put out of business by the test. Most of those that failed either have only small shortfalls to make up, or can point to ongoing restructuring plans as sufficient to turn fail to pass.

The ECB said 25 banks in all were found to need stronger buffers. Of those, 12 had already made up their shortfall during the months in which the ECB was carrying out its review. They found money by issuing new shares, or by shedding risky investments or loan businesses. The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers, up to nine months to actually carry out the plan.

The ECB checked the worth of banks’ holdings and subjected the banks to a stress test that simulates how their finances would fare in an economic downturn.

The exercise is aimed at strengthening the banking system so lenders can provide more credit to companies, boosting business activity and, hopefully, jobs. The economy has been plagued both by banks’ unwillingness to lend at affordable rates and by weak demand from companies that see no reason to risk borrowing.

ECB vice-president Vitor Constancio said the stress test and review were “quite strict” and that “the results guarantee that going forward the economic recovery will not be hampered by credit supply restrictions.”

The bank with the biggest shortfall was Italy’s Monte dei Paschi di Siena, which was found to need another €2.11bn.

Five of the banks – Eurobank (Greece), National Bank of Greece, Nova Ljubljanska Banka, Nova Kreditna Banka (both Slovenia), and Dexia (Franco-Belgian) – will be able to make up for their capital shortfall by sticking to their current restructuring plans.

Most of the other banks that failed were short amounts less than €1bn and in several cases less than €200 million. They can find the money by issuing shares, selling holdings, or holding back any profits instead of paying them out as dividends.

The bank review and stress tests pave the way for the ECB to take over on 4 November as the Europe’s central banking supervisor. The test is supposed to make sure hidden troubles in the system are fixed before landing in the ECB’s lap.

The ECB’s new role is aimed at strengthening the euro currency union in the wake of its crisis over government debt. It would do that by toughening oversight of banks and keeping their troubles from turning into huge losses for national governments through bailouts.