Seven of 91 European Union banks subject to stress tests failed with a combined capital shortfall of $4.5 billion, stirring concern the evaluations weren't strict enough.
Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks have insufficient reserves to maintain a Tier 1 capital ratio of at least 6% in the event of a recession and sovereign-debt crisis, lenders and regulators said Friday.
The banks are in "close contact" with national authorities over the results and the need for more capital, said the Committee of European Banking Supervisors, which coordinated the tests. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.
"It would have aided credibility if there had been a higher number of fails and a higher amount of capital raised," said Jon Peace, a London-based analyst at Nomura International. "People will be surprised that it is as small as that."
The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests ignored the majority of banks' holdings of sovereign debt, analysts said.
"The long awaited stress tests do not seem to have been that stressful after all," said Gary Jenkins, an analyst at Evolution Securities Ltd., in a note. "The most controversial area surrounds the treatment of the banks' sovereign debt holdings."
Regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1% on Greek debt, 12.3% on Spanish bonds, 14% on Portuguese bonds and 4.7% on German state debt, according to CEBS.
The tests also assessed the impact of a four-step credit rating downgrade on securitized debt products, a 20% slump in European equities in both 2010 and 2011 and 50 other macroeconomic parameters, including a drop in the EU's gross domestic product over two years, CEBS said.
In Germany, Hypo Real Estate, a property lender that was taken over by the state, was the only bank to fail among the 14 that were tested, the Bundesbank and the nation's financial regulator, BaFin, said in a joint statement.
Agricultural Bank of Greece, which is 77% owned by the Greek state, reported a shortfall of 242.6 million euros and said it would proceed with a share capital increase to strengthen capital.
Spain, with 27 tested banks, makes up the biggest portion of the exams. The savings banks that failed were: CajaSur; a merger group led by Caixa Catalunya; a group led by Caixa Sabadell; Caja Duero-Caja Espana, and Banca Civica. Spain's largest bank, Banco Santander SA, passed with a Tier 1 capital ratio of 10% under the most stringent scenario.
BNP Paribas, Societe Generale SA, Credit Agricole SA and BPCE SA, France's four largest banks, each have enough capital to outlast an economic slump and a sovereign debt crisis, the Bank of France said. In Britain, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc, and Royal Bank of Scotland Group Plc passed the tests, the Financial Services Authority said today.
The evaluations, which came two years after the U.S. subprime mortgage crisis roiled global financial markets, cover 65% of the EU banking industry.
Tests carried out in the U.S. last year found 10 lenders, including Bank of America Corp. and Citigroup Inc., needed to raise $74.6 billion of capital.