Sunday, October 26, 2014

25 European Banks Fail ECB Stress Tests

As the preliminary leaks indicated, 25 European banks fail the ECB stress tests. Greece, Italy and Portugal banks are weak. German banks held up well for the stress tests which will provide stability to the euro zone. The total shortfall in European banks as a whole is $32 billion in the event that a financial crisis occurs. One dozen or more of the 25 banks have already taken action to improve their capital positions.

The ECB is concerned over the perception of credibility of the tests since the prior bank stress tests blessed banks that subsequently went down the rabbit hole. 130 banks were tested resulting in the 25 failures, about one in five; 19%. The number of failures, however, cannot deem the success or failure of the stress tests since it is criteria-dependent. With near 20% of the European banks failing as per the bank stress test guidelines, if the criteria are stiffened, would one-half of the banks in Europe fail? The banks have two weeks of time to respond to the ECB conclusions and then six months to make changes to address their defects.

The European Banking Authority (EBA) releases complementary bank stress test results failing 24 banks. The EBA tested 123 European banks so the failure rate is also one in five; 20%. The bank failures are in several European nations including three Greek bank failures, three in Cyprus and nine in Italy. Monte dei Paschi rallied strongly Friday on the perception that Italy’s banks would fare better, however, the bank has a capital shortfall of $2.6 billion and the Italy banks are weak as originally thought. Generally, the European bank stress tests are in line with consensus. The price action in Monte dei Paschi will be interesting when it begins trading tomorrow.

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