25 euro area banks failed ECB stress tests

Approximately 25 euro area banks have failed the ECB’s stress tests, say people familiar with the matter. According to sources both in Europe and the US, none of the failing banks are German or French, but some are Italian.

Bloomberg News says it has seen a leaked draft communique of the final results. According to the document, one-hundred and five financial institutions have passed the test. Earlier this week, Spanish newswire EFE said about eleven banks from Cyprus, Belgium, Portugal, Austrial, Greece, and Italy had failed.

Eleven or twelve of these financial institutions have extra capital requirements.

We won’t know which banks failed until Sunday, when the European Central Bank releases the final results. The stress tests used bank data for the end of 2013, but several banks have taken steps to boost capital since then.

The ECB said in a statement:

“The comprehensive assessment, which consists of an asset quality review and stress tests of bank balance sheets, is not yet completed. No final results have been sent to banks involved. The results will not be final until they are considered by the Governing Council of the European Central Bank on Sunday 26 October, after which they will be published. Until that time, any media reports on the outcome of the tests are by their nature highly speculative.”

Mario Draghi

ECB President Mario Draghi wants to make sure that Eurozone banks can withstand financial shocks. He gave a stark waning to EU leaders that the region is staring recession in the face.

Nine days after publishing the results, the ECB takes over as the Eurozone’s financial regulator. It hopes this latest series of tests will help it be better equipped to preempt any financial meltdowns. In its two previous stress tests, it was unable to foresee problems which eventually led to the deaths of some lenders.

The ECB stress tests, or financial health checks, have been carried out on 130 banks across the Eurozone, i.e. countries that use the euro as their national currencies. The UK is in the European Union, but is not a Eurozone nation because it opted to hold onto the pound sterling.

The European Banking Authority is carrying out an overlapping study, which together with the ECB stress test, brings the total number of financial institutions tested to 150. Some non-Eurozone banks (in the other EBA’s review) may not pass the tests.

The ECB says the tests are crucial for investor confidence in the banking industry across the continent, and to bolster the flow of credit.

Most analysts have been expecting about 25 banks to fail. Bloomberg News quoted head of European macro-credit research at Royal Bank of Scotland Group plc in London, who said:

“The numbers are consistent with our expectations. It’s too early to say the exercise is credible. The key will be to see how much stress the strong banks will take, and how many of them will pass by a narrow margin.”

Bank Stress Test

A Bank Stress Test examines a financial institution’s ability to withstand unfavorable economic scenarios, i.e. it undergoes simulations of financial shocks to determine whether it has enough capital to survive.

Tests can be done by banks themselves as part of their own risk assessment, or by supervisory authorities.

The tests are useful for determining whether there are any weaknesses in the banking system at an early stage, making it possible to implement preventive measures.