The European Central Bank (ECB) has said that 25 of Europe’s 130 biggest banks have failed an in-depth review of their finances designed to check their financial health.
ECB official said on Sunday that 13 of these banks need an extra 10bn euros ($12.5bn) to cushion themselves against any future crises.
Although the landmark review identified only a handful of weak banks, ECB officials also said that it was tough enough to ensure Europe’s banks will be purged of the bad investments that have made some of them hold back on lending.
That means the banks will be ready to lend to businesses when the economy finally picks up, they said.
“The results guarantee that going forward the economic recovery will not be hampered by credit supply restrictions,” said ECB Vice President Vitor Constancio.
Yet after months of talk about banks being too weak to lend, it appeared unlikely that any would be put out of business by the review’s results.
The ECB, working with the European Banking Authority, checked the worth of banks’ holdings in a so-called asset quality review and subjected the banks to a stress test that simulates how their finances would fare in an economic downturn.
The ECB said 25 banks were found to need 25 billion euros. Of those, 12 had already made up their shortfall during the months in which the ECB was carrying out its review, which was based on bank finances at the end of 2013. They found money by issuing new shares, or by shedding risky investments or loan businesses that reduced the amount of capital needed to backstop those holdings.
The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers and up to nine months to actually carry out the plan.
‘Confidence’ is key
Financial Analyst Martin Baccardax told Al Jazeera that the keyword when it came to the banking system was confidence.
“From these tests we can hope that banks will trust one another and that there would be transparency. What is more important to see going into 2015 is whether the banks are going to be prepared to lend more money to business to create more money in an economy that has been flat for several quarters and is threatening to turn back into recession.” said Baccardax.
“If that can be held off, then the ECB will be able to look at this test as an incredible success to engender confidence – [which is] everything in the banking system, no less so than here in Europe.”
As it prepares to become the eurozone’s banking regulator, the ECB is under pressure to show its review will be more effective than similar tests carried out by the EU in 2010 and 2011 that gave a pass to banks that later needed bailouts.
Italy had most of the banks that needed more capital – 4 of the 13. The bank with the biggest shortfall was Italy’s Monte dei Paschi di Siena, which was found to need another 2.11 billion euros.
Five of the banks – Eurobank, National Bank of Greece, Nova Ljubljanska Banka, Nova Kreditna Banka, and Dexia – will be able to make up for their capital shortfall simply by sticking to their current restructuring plans.
Most of the other banks that failed were short amounts less than one billion euros and in several cases less than 200 million euros.
The bank review and stress tests pave the way for the ECB to take over on November 4 as the eurozone’s main supervisor for the bloc’s biggest banks, a key step in building stronger financial oversight in the wake Europe’s crisis over government debt.
The ECB will take over from national supervisors, who were considered to be too easy on their home banks and unwilling to step in to ward off problems.