Regional banks pass stress test

  • 2010-07-28
  • Staff and wire reports

RIGA - Sweden’s four main banks are well equipped to withstand the fallout from a financial crisis, according to the results of stress tests carried out on banks in the European Union, writes Swedish The Local. Nordea, SEB, Handelsbanken and Swedbank, along with Denmark’s Danske Bank, Jyske Bank and Sydbank and Finland’s OP Pohjola all passed the stress test in which 91 European banks were examined by EU authorities to test their ability to resist another crisis.
The Swedish Financial Supervisory Authority (FI) said in a statement on July 23 that the Swedish banks had passed the test “with a comfortable margin.” The Danish Financial Supervisory Authority said the test did not “change the perception of financial stability in Denmark, and hence no new initiatives are called for.”

Finland’s Financial Supervisory Authority meanwhile said the test “confirmed the good health of the Finnish banking sector,” and that the results did “not warrant any special measures for ensuring the stability of the banking sector in Finland.”
This is comforting news for the Baltics, as the Nordic banks are the dominant lenders in these countries. Swedbank and SEB are particularly exposed, as they control around 40 percent of lending in Latvia and well over 50 percent of lending in the other two Baltic countries, notes a Roubini Global Economics report.

The London-based Committee of European Banking Supervisors (CEBS) on July 23 released results of tests conducted in cooperation with national supervisory authorities and the European Central Bank to reassure investors that European banks stood on firm financial footing.

Hypo Real Estate in Germany, five regional lenders in Spain and a bank in Greece failed the test.
The stress test used three distinct macroeconomic scenarios. The scenarios do not express the current or expected trend in the economy but were designed to assess the resilience of the European banking sector against an unexpected deterioration of macroeconomic conditions, reports news agency LETA. The Committee of European Banking Supervisors (CEBS) set the limit for passing the test at a Tier 1 capital ratio of six percent.

Banks, according to the tests, need to raise 3.5 billion euros of capital, though this is only about a tenth of the lowest analyst estimate, leaving doubts about whether regulators were tough enough. “The stress tests are a helpful step forward in a number of areas,” Huw van Steenis, head of European banks research at Morgan Stanley in London, said on July 25. “But they are not going to be the game changer that we were really hoping and in some cases are a missed opportunity.”
Germany’s Hypo Real Estate Holding, Agricultural Bank of Greece and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least six percent in the event of a recession and sovereign-debt crisis, lenders and regulators said July 23.

The banks that failed the stress tests are in “close contact” with national authorities over how they will raise capital, said the CEBS, which ran the assessments. Had the Tier 1 threshold been seven percent, 24 of the banks would have failed, said Andrew Sheets, Morgan Stanley’s head of European credit strategy in London. For some, there is “serious work to do,” he said.

Before the results were published, analysts at Nomura Holdings Inc. estimated the banks would have to raise 30 billion euros. Goldman Sachs Group Inc. predicted they would need 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that ten lenders, including Bank of America Corp. and Citigroup Inc., needed 74.6 billion U.S. dollars.

“If we had at least one bank which the markets hadn’t really expected to fail, that would have given the stress tests more credibility,” Lothar Mentel, chief investment officer at Octopus Investments Ltd. in London.
“The seven that failed the tests were already banks that had failed or were on the watch list, and that says to me that these tests are not telling us anything we don’t already know,” said Komal Sri-Kumar, chief global strategist at TCW Group Inc. in Los Angeles. “I don’t think the markets will buy it.”

The European tests ignored the majority of banks’ holdings of sovereign debt. Regulators don’t believe there will be a national default, European Central Bank Vice President Vitor Constancio said July 23.
The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said.

The stress tests assumed a loss of 23.1 percent on Greek debt, 14 percent on Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to the CEBS. U.K. government bonds were subject to a ten percent haircut and France 5.9 percent, CEBS said.
The stress tests are rigorous enough to be taken seriously, Credit Suisse Group analysts, led by Daniel Davies, said in a report after the results were published. Banks passed because the European industry has raised 220 billion euros in the last 18 months to bolster capital, they said.

The Credit Suisse analysts found that the majority of banks still passed the tests when they were reengineered to include bigger haircuts on sovereign debt and better quality capital. Under those more rigorous tests, seven Greek banks and KBC Groep NV would fail.

“The criteria used by CEBS created a level playing field for all 91 banks,” Viviane Huybrecht, a spokeswoman for KBC in Brussels, said by phone. “If you now come up with other criteria, then of course you end up with other results.”
The U.S. stress tests carried out last year were criticized at the time for being too soft. Yet the evaluations on 19 banks helped persuade investors that the financial system was sound, contributing to a 36 percent rally in the S&P’s Financials Index in the following seven months.

“Nobody would say we are looking at a complete and utter disaster here in the euro zone banking system,” said Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd. “The worst fears have not been realized.”