bank stress testEight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion). Agricultural Bank of Greece SA, Austria’s Oesterreichische Volksbanken AG and Spain’s Banco Pastor SA were among the failures. The companies were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said. All banks tested in Italy, Germany and the U.K. passed. The assessments are the first by the European Banking Authority since it was set up earlier this year.
Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months. “Any institution failing the stress test could be left facing funding challenges, the potential loss of stakeholder confidence and the risk of a credit-rating downgrade,” Steve Pearson, a partner at PricewaterhouseCoopers LLP, said in a note to clients. “Experience has shown the premium the riskier institutions might have to pay to retain some of their depositors could increase to an unsustainable level.
Rating company Standard & Poor’s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn. In contrast, a survey of 113 investors by Goldman Sachs Group Inc. last month showed they expect banks to raise 29 billion euros after the tests. Sovereign Yield
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