EUROPEAN BANKS may have to raise as much as €80 billion of additional capital as the stress tests failed to allay investor concern about a Greek default and governments’ ability to bail out their lenders.
The eight banks that failed out of the 90 tested last week had only a combined capital shortfall of €2.5 billion, the European Banking Authority said.
As many as 20 banks need to bolster capital, JPMorgan Cazenove analysts led by Kian Abouhossein wrote in a report after the results were published.
Regulators did not include a Greek default in the tests even though credit default swaps indicate investors saw an almost 90 percent chance of one. The EBA included a 25 per cent writedown on 10-year Greek government bonds held in banks’ trading books even as the securities trade at about 50 cents on the euro.
The exams would not succeed in reassuring investors until governments put in place a mechanism to stop failing banks weighing on public funds, said Gary Greenwood, an analyst at Shore Capital.
Hank Calenti, a bank strategist at Societe Generale SA in London, said: “The EBA are stress-testing the wrong thing. They need to be testing the ability of the euro zone to support its banks. It’s firstly a question of the ability of the sovereign to bail out the banks, and then who is going to bail out the sovereign,” he added.
Dirk Hoffmann-Becking, an analyst at Sanford C Bernstein, said in a note to clients: “The European banking stress test is unlikely to provide much in terms of assurance to the markets. Concerns about contagion of the sovereign debt crisis into core Europe have taken centre stage.
EU leaders are at odds with one another and with the European Central Bank over demands by Germany and Finland that private investors bear some of the burden for a second Greek bailout.
Rating company Standard and Poor’s own stress test, published in March, found European banks would need as much as €250 billion in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn.
Investors expected as many as 15 banks to fail the stress tests and raise €29 billion after the latest assessments, according to a survey by Goldman Sachs last month.
“I’m quite sceptical that this whole exercise will have any favourable consequences,” said Cesar Molinas, a former head of European fixed income at Merrill Lynch and Co and now an independent consultant. “It seems to have been something of a waste of time and money.”
About 20 banks would have failed had they not raised capital in April, the European Banking Authority said. The shortfall would have totalled €26.8 billion without the extra money.
“The capital-raising story isn’t over,” said Christopher Wheeler, a banking analyst at Mediobanca in London. “The tests haven’t comforted the market. The banks still need to raise capital in the event of a sovereign default.”
UniCredit, Deutsche Bank, BNP Paribas, Credit Agricole, Societe Generale, Banco Santander and Credit Suisse Group were among banks that may have to raise a combined total of about €62 billion in additional capital, Mr Wheeler added.
