LONDON - All but seven of 91 European banks passed the much-anticipated "stress tests" aimed at showing Europe's banking system is sound enough to weather the continent's debt crisis -- an outcome that officials hoped would forestall further market turmoil.
It had been thought that some banks needed to fail for the exercise to be accepted as credible, and some analysts still argued that the results showed the tests weren't rigorous enough -- the euro was trading flat on the day after the release of the results at just below US$1.29.
If stock and bond markets take the view that the tests were not tough enough when European trading resumes Monday, then the exercise could make matters worse -- and further expose the EU to charges that it has failed to rise to the debt crisis within its borders.
"The stress tests do not seem that stressful and it is looking more like a political whitewash rather than a genuine attempt to reassure financial markets that eurozone banks have balance sheets that could really withstand sovereign risk shocks," said Neil MacKinnon, global macro strategist at VTB Capital.
"They are delaying the day of reckoning," said MacKinnon.
Policymakers in Europe hope the results will reassure markets worried about hidden bank losses from the crisis. They were quick to laud the results as a resounding vote of confidence in Europe's banking system.
The European Union said the results "confirm the overall resilience" of the continent's banking system.
Christine Lagarde, France's finance minister, said the tests were "tough" and "very comprehensive and as a result I would suggest that those results should be very credible and should raise the confidence in European banks."
The Committee of European Banking Supervisors, the little-known regulator charged with conducting the stress tests, said the seven banks would see their capital positions fall too low for them to weather a steep fall in the price of government bonds many of them hold, a worst-case scenario dubbed "sovereign shock" still stopped short of an outright debt default by an EU government. That may make the tests less convincing to some, since many analysts still predict Greece will eventually have to restructure its debt -- a polite word for default, under which creditors are paid over a longer period of time.
Germany's already-nationalized lender Hypo Real Estate Holding AG failed the strength test, but that had been widely expected. So far, the bank, which does not expect to return to profit before 2012, has received capital injections worth euro7.7 billion (US$10 billion) from the German government's bank rescue fund and loan guarantees of more than euro100 billion.
There had been speculation in the run-up to the publication of the results that some of Germany's regional banks -- the landesbanken -- would fail to clear any stringent hurdles.
As it was, only NordLB came close to joining Hypo but barely scraped by.
As expected, Spain notched up the most casualties, with five of its small savings banks -- the so-called cajas -- deemed as having insufficient capital to deal with future adverse shocks following the collapse of the country's property boom. The five Spanish banks -- none of them listed on stock markets -- were Diada, Unnim, Espiga, Banca Civica, and Cajasur, which was bailed out by the Bank of Spain in May.
Greece's ATE bank failed and confirmed it would go ahead and proceed with a capital increase, which will involve the highly-indebted Greek government itself, the main shareholder.
In total the seven banks have to raise euro3.5 billion to shore up their finances, CEBS said.
That's far lower than some analysts had been predicting. But the supervisors said Europe's banks have, over the past couple of years, gone a long way to shoring up their balance sheets.
Anxiety about Europe's banks mounted in tandem with the government debt crisis, which eventually led to a euro110-billion (US$142-billion) international bailout of Greece and a $1-trillion backstop for other troubled governments if they need it.
The worry was the banks were holding government bonds from the likes of Greece, especially as their finances had already been battered by the recession. Banks became more reluctant to lend to each other and many of Europe's banks became more dependent on emergency funds from the European Central Bank for much of their day to day needs.
"It seems the tests may have raised more questions than they have answered and in the coming weeks it will be the interbank lending markets that will have the real answer as to whether real confidence has returned to the European banks," said Mark O'Sullivan, director of dealing at Currencies Direct.
