Yesterday, the Committee of European Banking Supervisors (CEBS) released the results of the 2010 EU-wide stress test, conducted in coordination with 20 national supervisory authorities. In total, 91 European banking groups were examined, representing approximately 65% of the EU banking system’s total assets, a marked expansion beyond the 26 major cross-border banking groups that were tested in 2009.

In sum, all but 7 of the 91 banks “passed” the stress tests. CEBS acknowledged that “the aggregate results suggest a rather strong resilience for the EU banking system as a whole and may appear reassuring for the banks in the exercise, but it should be emphasized that this outcome is partly due to the continued reliance on government support for a number of institutions.” CEBS cautioned that “any considerations of possible exit strategies should rather take into account detailed case-by-case analysis in order to ensure banks’ long-term viability after an exit from government support has taken place.”

The purpose of this stress test was to assess “the resilience of the EU banking system to possible adverse economic developments and to assess the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks,” and to assess their current dependence on public support measures. The test involved modeling macroeconomic and sovereign debt stresses using two sets of macro-economic scenarios, a “benchmark” scenario and an “adverse” scenario, with specific assumptions and methodologies detailed in the summary report. The stress test started with consolidated 2009 year end capital levels, applied the various scenarios over a two-year period (2010-2011), and used a 6% Tier 1 capital ratio as a benchmark. The CEBS clarified in its Summary Report that the 6% threshold “should by no means be interpreted as a regulatory minimum,” noting that the regulatory minimum Tier 1 capital ratio is set by the Capital Requirements Directive (Directive EC/2006/48) at 4% (although the CEBS also notes, in a footnote, that several EU Member States have opted for higher minimum capital adequacy ratios).

With respect to European sovereign debt exposures held in trading portfolios, the test assumed varying levels of mark-to-market losses, as high as 23.1 percent in the case of trading portfolio holdings of Greek debt. Notably, however, the test did not require write downs due to market fluctuations of sovereign debt classified as “hold to maturity” but rather, required write downs in the case of a permanent impairment, such as a sovereign default. However, the stress test assumed no defaults on European sovereign debt. CEBS explained, “the European Financial Stability Facility (EFSF) and the related commitment of all participating member States provides reassurance that the default of a member State will not occur, which implies that impairment losses on sovereign exposures in the available for sale and held-to-maturity in the banking book cannot be factored into the exercise.”

In total, the stress test reveals that, for the 91 participating banks, “aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2011,” with their aggregate Tier 1 capital ratio decreasing from 10.3% in 2009 to 9.2% by the end of 2011. CEBS notes that these aggregate results include “approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio.” The stress test results assume “the continued reliance on government support for currently 38 institutions in the exercise” and reflect “any regulatory imposed decisions (e.g. restructuring plans agreed with the EU Commission under the State Aid reviews) as well as management actions (e.g. capital raisings or divestment programmes) publicly announced before 1 July 2010,” but do not assume “any government support of recapitalisation measures taken after 1 July 2010.”  

Seven of the 91 banking groups (one German, one Greek and five Spanish) would see their Tier 1 capital ratios fall below the 6% benchmark, with an aggregate Tier 1 capital shortfall of €3.5 billion. Those seven banks, their projected Tier 1 capital ratios under the adverse scenario and the amount of capital required to raise their Tier 1 capital ratios to 6% are:

  • Hypo Real Estate Holding, AG – 4.7% – €1.245 billion
  • Agricultural Bank of Greece S.A. – 4.36% – €242.6 million
  • Caixa Destalvis de Catalunya/Caixa Destalvis de Tarragona/Caixa Destalvis de Manresa – 3.9% – €1.032 billion
  • Caja de Ahorros y M.P. de Navarra/Caja de Ahorros Municipal de Burgos y Caja General de Ahorros de Canaries – 4.7% – €406 million
  • Caixa Destalvis de Sabadel/Caixa Destalvis de Terrassa/Caixa Destalvis Comarcal de Manlleu – 4.5% – €270 million
  • Caja de Ahorros y Monte de Piedad de Cordoba (CajaSur) – 4.3% – €208 million
  • Caja de Ahorros de Salmanica y Soria (Caja Duero)/Caja de Espana de Inversiones Caja de Ahorros y Monte de Piedad (Caja Espana) – 5.6% – €127 million

CEBS states that "the competent national authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalization.” Each bank is expected to propose a plan to address the weaknesses revealed by the stress test, which plans “will have to be implemented within an agreed period of time, in agreement with the supervisory authority.”