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Most viewed in Economics
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No EU deal on banking rulesUK blocks compromise agreement on new bank capital requirements at meeting of EU finance ministers. |
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2011
Banks were assessed for their resilience to an adverse (but, according to regulators, realistic) scenario. The adverse scenario looked at banks' ability to withstand a deterioration over 24 months from the 2010 baseline forecast of economic variables such as gross domestic product (in this case a fall of four percentage points), house prices, interest rates and sovereign bonds.
In June, the European Banking Authority (EBA) toughened its criteria to take account of the losses banks might suffer from sovereign debt exposure to crisis-hit countries such as Greece. While the tests did not assume a government default, banks were asked to “assess risks” against sovereign debt.
Banks were tested to ensure that they held a core Tier 1 capital reserve ratio of at least 5%. Core Tier 1 capital is considered a good measure of financial strength because it does not include subordinated debt, which, in the event of a default, is paid back only after senior debt.
Eight out of 91 banks tested failed. From Spain: Banco Pastor (projected core Tier 1 ratio of 3.3%; needs an additional capital requirement of €317 million); Caja de Ahorros del Mediterraneo (3%; €947m); Caja3 (4%; €140m), CatalunyaCaixa (4.8%; €75m); and Unnim (4.5% and €85m). From Greece: Eurobank EFG (4.9%; €58m); and Agricultural Bank of Greece (-0.8%; €713m). From Austria: Volksbanken (4.5%; €165m). A ninth bank, Helaba, based in Germany, withdrew.
A further 16 banks would have failed if the threshold for core Tier 1 had been set at 6% rather than 5%.
2010
Banks were required to sustain a minimum level of Tier 1 capital (less tough than this year's ‘core' Tier 1 capital) of at least 6%, The adverse scenario consisted of a three-percentage-point dip in the EU's gross domestic product over two years and a fall in the value of sovereign bonds.
Seven out of 91 banks tested failed: Hypo Real Estate, of Germany, Agricultural Bank of Greece, and Diada, Espiga, Banca Civica, Unnim and Cajasur, of Spain.
A further 17 banks would have failed the tests had the threshold for Tier 1 capital been set at 7% instead of 6%.
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