From Athens to Madrid, London and Rome, EU leaders and regulators let out a sigh of relief on 23 July in the aftermath of the publication of the results of the “stress tests” imposed upon 91 European banks (Europolitics 4028). “ The stress-testing exercise is comprehensive and rigorous. It confirms the resilience of EU and euro area banking systems to major economic and financial shocks,” said the European Central Bank (ECB). The Belgian presidency was also pleased with the “ solidity” of the banking system. Economic and financial analysts were however rather sceptical. In order to be able to judge they await the market’s reaction, in particular the interbank market.

Only 7 out of 91 banks failed the test. These will have to submit a financial reinforcement plan indicated the Committee of European Banking Supervisors (CEBS), which does not exclude recapitalisations. “ We are waiting for these banks to submit a plan which deals with weaknesses exposed by the resistance tests,” added the CEBS. An additional seventeen banking institutions are located in the danger zone with regards to the tests due to a ratio of own resources, know as solvency, barely over the 6% mandated by CEBS. Amongst these are many large or medium banks whose creditworthiness is essential to financial stability, such as the German Deutsche Postbank, the Allied Irish Banks or the Italian Monte dei Paschi di Siena. Moreover, the resistance tests show that a large number of European banks remain very dependent upon state aids, in particular in the United Kingdom. A few owe their success solely to the financial support of the state. Out of 91 banks tested, 38 still benefit from public aid, the total of which amounts to 197 billion Euros. Though the banking sector is resilient it still bears the scars of the financial crisis of 2008-2009.

“ If you take a look at the criteria it was a difficult exam to pass,” assured the French Minister of Economy Christine Lagarde. According to her “ Europe brought the last necessary contribution to restore confidence” in banks and in EU member state, following two years of hardships. Her Spanish counterpart, Elena Salgado, hopes that the improvements seen this week will “ gain momentum and that credit will start to circulate anew.” Despite the failure of the ATE (Agricultural Bank of Greece), “ the results (…) show that the Greek banking system can cope, even under extreme conditions,” declared the Greek Minister of Finances Georges Papaconstantinou. Nevertheless, he urged Greek banks to “ take the necessary strategic decisions to reinforce their capital level due to the restructuration context of the Greek banking system.” Germany took a similar stance. The surveillance authority, Bafin, and the Bundesbank, believe the “ German banking system proved its robustness and it resilience capacity even in the most pessimistic previsions.”

The Director General of the International Monetary Fund (IMF), Dominique Strauss-Kahn, applauded the results of the resistance tests which he qualified as a “ considerable undertaking” in view of restoring market confidence. The US Secretary of State to the Treasury, Timothy Geithner, also welcomed “favourably” the publication of the results. “ With this undertaking, the EU has made a significant effort to increase disclosure on the conditions of individual European financial institutions and enhance market stability.”

UNCONVINCED ANALYSTS

While applauding the quantity of information published and the transparency efforts thus achieved, economic analysts remain however cautious and even sceptical, expressing clear doubts about the difficulty of the tests.

“ There will be need for time in order for the market to digest all this information,” said the chief economist at Unicredit, Marco Annuziata. According to him it is “ a first step towards further transparency but an insufficient one in order to improve significantly confidence in the European banking sector, which should have been the principal aim of the exercise.” “ These test are not particularly strict,” commented Jennifer McKeown, an economist at Capital Economics. “ In the following weeks, the interbank market will bring the answer to the question of knowing whether confidence in European banks has been restored,” explained Mark O’Sullivan, of Currencies Direct. According to Chris Turner (ING), “ this result corresponds more or less to what was expected.” He adds however that “ the stress test release does not appear to have uncovered any ‘skeletons in the closet’. Whether it goes far enough remains to be seen.”

SWISS BANKS SAFE

The two main Swiss banks, UBS and Crédit Suisse unsurprisingly passed the resistance tests noted the Swiss Federal authority of surveillance of financial markets (Finma). “ Even in case of a major crisis (...), the two institutions would retain a solid capital base, with a Tier 1 ratio of at least 8%,” highlights Finma. Banks were supposed to keep a level of own resources, so-called Tier One, of 6% for the regulator to consider they passed the test. “ During the last exam, Finma tested the resistance capacity of the large banks in the hypothesis of a world recession coupled, this time, with the deterioration of the financial situation of European states,” states the text. It concludes pointing out that “ due to the relatively modest exposition of the two Swiss institutions to these countries, these specific shocks only have a weak impact.”

“We are waiting for these banks to submit a plan which deals with weaknesses exposed by the resistance tests,” added the CEBS