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Several European Banks Flunk Recession Stress Test


"...these results will not assuage investors' fears..."

In a a comprehensive test designed to predict how certain banks would fare in another recession, eight of 90 European banks flunked with 16 more "barely passing," reports The Associated Press. This has led analysts to doubt whether the test results would restore confidence in Europe’s unstable financial sector.

“Some countries challenged the results as inaccurate and overly pessimistic, saying they would not force their weaker banks to raise new cash. Economists warned that the tests were insufficient because they did not simulate the main risk hanging over Europe, a default by Greece,” the AP reported.

Business leader were mostly satisfied with the results because the euro was barely affected in the given scenarios. However, several analysts questioned whether the tests achieved its overall goal, that is, to restoring and instill a sense of confidence in an economy that is carrying billions in debt from like Greece, Ireland and Portugal.

"The publication of these results will not assuage investors' fears over the resilience of the EU banking sector," said Marie Diron, senior economic adviser for Ernst & Young.

While the tests were good for singling out exceptionally weak banks, Diron noted that debt default was "the single greatest risk facing the European banking sector at present."

When it presented the results, the European Banking Authority (EBA) said the failing banks needed to raise a total of €2.5 billion ($3.5 billion) to improve their safety-net capital. Among the countries with banks that were in danger were:

1) Spain. Commonly seen as the next-weakest link in the 17-country eurozone, they had the worst test result. Five banks (Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Group Caja3) flunked the test miserably, while seven others barely scraped by.

2) Greece. Two lenders, EFG Eurobank and government-owned ATEBank, flunked the tests with two others almost failing.

3) Austria. Oesterreichische Volksbank AG was the only lender outside the “crisis countries” to not pass, though German Landesbank Helaba dropped out of the tests earlier this week, stating that the EBA refused to take into account capital it had set aside (“banking regulator's decision to not count certain types of capital for its stress scenarios has come under fire from several countries and could become a major hurdle for the tests' credibility”).

4) One bank in Slovenia, one in Italy, one in Cyprus, and two in Portugal also only just survived the EBA's stress test.

"I refuse to accept that the five failed the test," Bank of Spain Governor Miguel Angel Fernandez Ordonez said Friday in the Associated Press report, insisting that none of the Spanish banks had to raise additional capital.

German officials also questioned the tests' results, saying they saw no reason for any of their banks to take action, even though two - HSH Nordbank AG and Norddeutsche Landesbank – were categorized as having “barely passed.”.

Nordbank and Norddeutsche Landesbank both challenged the stress test results, saying they didn't reflect how strong they were.

“The EBA said Friday that the main reason so few banks failed the test was that it gave lenders the opportunity to raise capital ahead of the result's release. At the end of last year, 20 banks would have failed the tests and between January and April lenders raised a total of €50 billion ($71 billion) in preparation for the test,” The Associated Press reported.

Now if we could get the banks (both here and internationally) to behave as if they were constantly under tests conditions, then perhaps we could get them to behave more responsibly.

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