The failing banks should “promptly” take steps to strengthen their financial cushions against losses, the European Banking Authority said as it released the results. They now have to raise a total of 2.5 billion euros ($3.5 billion).
Spain, whose many local savings banks have been closely watch by analysts, fared worst, with five banks failing to prove that their capital buffers were strong enough to sustain the regulator’s stress scenario.
The banks were Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Grupo Caja.
Two Greek banks, EFG Eurobank and ATEBank, also flunked, as did Austria’s Oesterreichische Volksbank AG.
The banks that barely passed have been asked to strengthen their finances along with the ones that failed.
The EBA lacks the power, however, to force banks to raise more capital — whether from investors or governments — or to make them merge or sell businesses. Only their national governments can do that.
The tests are a key element in Europe’s fight against the debt crisis. With most market watchers expecting Greece — and possibly the other bailout victims Ireland and Portugal — to eventually reneg on part of their massive debt piles, concerns over what such a default would do to banks around the continent has triggered panic on financial markets in recent weeks.
Officials hope that the stress tests identify weak banks and make them strengthen their finances. While the test scenarios did not include a default by a European country, each bank had to report its exposure to sovereign debt, allowing economists to run their own analyzes.
The test, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts. For the 17-country eurozone, that would be a drop of 0.5 percent this year and 0.2 percent next year.
The banks were required to maintain a financial pad of at least 5 percent of their loans, investments and other assets.
The financial pad — dubbed Core Tier 1 capital — stands ready to absorb unexpected losses and is therefore a key measure of a bank’s stability.
One bank, Germany’s Helaba, pulled out of the tests in a dispute with the EBA over whether large part of the bank’s capital in the form of non-voting holdings by government would count.
