Europe's banks are still under stress

How it worked

The tests were based on two scenarios: a ‘benchmark' scenario and an ‘adverse' scenario. The benchmark scenario assumed a mild recovery from the downturn of 2008-09. The adverse scenario included two main elements:
A three-percentage-point dip in the EU's gross domestic product (GDP) for the period 2010-11, compared to current projections. This would leave the EU with 0.0% GDP growth in 2010, and negative growth of 0.4% in 2011

A sovereign risk shock. The shock involved a fall in the market value of governmen five-year bonds, ranging from 23.1% for Greece to 4.2% for Slovenia. The average fall in the EU was 8.5%. The CEBS said that this would amount to a “deterioration of market conditions” comparable to the peak of the Greek debt crisis in May.

Close to the edge

17 banks would have failed the tests had the tier-one ratio been set at 7%, instead of 6%.
Banco Pastor, Spain (6.0%).
Piuraeus Bank Group, Greece (6.0%)
Caja Sol, Spain (6.0%)
Caja 3, Spain (6.1%)
Banco Guipuzcoano, Spain (6.1%)
Colonya Bank Caixa D'Estalvis de Pollensa, Spain (6.2%)
Monte Dei Paschi Di Siena, Italy (6.2%)
Norddeutsche Landesbank, Germany (6.2%)
Nova Ljubljanska Banka, Slovenia (6.3%)
Jupiter, Spain (6.3%)
Allied Irish Banks, Ireland (6.5%)
Caja De Ahorros Y Monte De Piedad De Ontinyent, Spain (6.6%)
Deutsche Postbank, Germany (6.6%)
Caja de Ahorros y Monte de Piedad de Zaragoza Aragón y Rioja, Spain (6.7%)
Unione Di Banche Italiane, Italy (6.8%)
Bankinter, Spain (6.8%)
Espírito Santo Financial Group, Portugal (6.9%)

What happens now

Banks that failed the test will need to take measures to strengthen their capital. Those that narrowly passed are also under pressure to do so.
The Spanish and Greek governments have made clear that public support is available for their banks if they cannot recapitalise through private means. The German government already has plans in place to repair Hypo Real Estate's finances.

In Italy, where several banks passed the test by narrow margins, the government said that it would reactivate a dormant scheme that allows banks to issue government-backed bonds.

The European Commission would need to give its approval before member states could use state aid to recapitalise banks. The Commission has said that it will respond to state-aid applications very quickly, possibly even overnight.

Bottom of the pile

The following banks failed the stress tests:
Hypo Real Estate (HRE), Germany: The bank was a major casualty of the financial crisis and was completely nationalised in October 2009. Its tier-one capital in the test was 4.7%, €1.24 billion below the 6% threshold. The German central bank has announced that €210bn of impaired assets will be transferred from HRE to a ‘bad bank', so improving its capital ratio.

Agricultural Bank of Greece (ATEbank): ATEbank is majority-owned by the Greek state. Its tier-one capital in the test was 4.36%, €242.6 million below the threshold. It has announced that it will strengthen its capital through a share capital increase. The bank is the subject of a takeover bid by Piraeus Bank, another major Greek lender. The Greek government has given the bank until the end of the year to present a full plan to repair its finances.

Diada, Spain: Its tier-one capital in the test was 3.9%, €1.03bn below the threshold. The bank has yet to specify how it plans to strengthen its capital.

Espiga, Spain: Its tier-one capital in the test was 5.6%, €127m below the threshold. The bank has yet to specify how it plans to strengthen its capital.

Banca Civica, Spain: Its tier-one capital in the test was 4.7%, €406m below the threshold. It said that it would be able to cover the shortfall through an agreement with a US private-equity firm.

Unnim, Spain: Its tier-one capital in the test was 4.5%, €270m below the threshold. The bank has yet to specify how it plans to strengthen its capital.

Cajasur, Spain: The bank had to be rescued by the Spanish government in May. A merger is under way with BBK, another Spanish savings bank. Cajasur's tier-one capital in the test was 4.3%, €208 million below the threshold. Its merger with BBK renders the stress-test result largely irrelevant.
The Bank of Spain has said that it will set a deadline, possibly for the end of this year, for the five banks to raise the extra capital needed.