24 European banks fail financial stress tests

26th October 2014

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The European Banking Authority (EBA) has found that 24 institutions have failed to pass a stress testing of their finances.

The EBA’s 2014 EU-wide stress test of 123 banks, which looked at how well banks could cope in the wake of another financial crisis found that those who fell short, did so to the collective tune of 24.6bn euros as at the end of 2013.

However as a result of additional capital raised in 2014, the shortfall has eased back to 9.5bn euros across 14 institutions, with the worst affected being Italy’s Monte dei Paschi which has a 2bn euros gap to fill.

No British banks failed to pass but the Bank of England is currently undergoing its own analysis on their strength.

The European Central Bank (ECB) will be eagerly hoping that the test will have raised confidence in the troubled region’s banking system.

Howard Archer
, chief UK and European economist
 at IHS Global Insight said: “The ECB itself has frequently stressed confidence that once those banks that pass the stress tests are openly in the clear, a significant number will become more prepared to access the cheap liquidity that the ECB is increasingly providing under the stimulative measures announced in June and September, and to lend to the private sector.”

There has been belief that a number of banks have held off from lending so as to make their balancer sheets look as strong as possible.

But even if banks become more prepared to lend now that the stress test are out of the way, Archer added that it is very far from certain that there will be increased demand for capital from the private sector in many countries given current Eurozone weakness, faltering business confidence and the uncertain outlook amid geopolitical tensions.

Paras Anand, head of European equities at Fidelity Worldwide Investment believes that the challenge faced by the sector going forward is the same witnessed across developed markets. He said: “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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