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Eight Of 90 European Banks Fail 'Stress Test'


There are lingering questions about the effectiveness of the banking stress test.
BRUSSELS -- Eight European banks have failed an EU-wide stress tests that was aimed at convincing markets that the continent's financial systems can survive major shocks like a possible Greek default.

The simulated test was seen as an important way for the EU to persuade investors that it is being transparent about the challenges European banks are facing. But it comes at a tricky time, as it forces the EU to balance the need to hold its financial system accountable while not rattling nervous markets with even more bad news.

Andrea Enria, the chairwoman of the European Banking Authority (EBA), which compiled the results, was cautiously optimistic in her assessment of the situation.

"This result provides us with some important reassuring messages, but we must not be complacent," she said. "The EBA is acutely aware that the European banking sector is under severe strain at the time of publication."

Jonathan Faull, the director-general for the European Commission's Internal Market and Services Directorate General, was also keen to point out the readiness of the system to absorb economic shocks in the future.

"This, I think, shows that the European Unions' mechanisms are working, its authorities are working, [and] its network of national banking supervisors are working together," Faull said. "The coordination is in place."

Ninety banks in 21 countries were tested on how they would cope if there was a 0.5 percent contraction in the eurozone economy, a 15 percent drop in stock markets, and defaults on sovereign debt.

Of the eight failed banks, five were Spanish, two were Greek, and one was Austrian.

The European Banking Authority will now give each failing bank recommendations on how to find more capital, as well as advice to an additional 16 banks that were on the border of pass or fail. They include institutions in Cyprus, Germany, Italy, Portugal, and Slovenia.

But there are lingering questions about the effectiveness of the stress test.

Last year, a similar test on Europe's banking sector was carried out and only seven out of 91 banks failed -- but none was from Ireland, whose banking sector needed a bailout by the European Union and the International Monetary Fund a few months later.

The European Banking Authority's Enria warned against reading too much into this round of results.

"A stress test is not a forecast," Enria said. "It is not something giving a clean bill of health to anybody. It's conditional on the assumptions which are made. If the market develops in a different direction, of course the results may well be different. This means that we as supervisors need to continue monitoring. The history does not close with the stress test."

European banks still hold billions in bonds from financially troubled governments such as Athens. A default or other losses on those bonds could hurt banks and make it harder for businesses to get credit, which could create a so-called "credit crunch" of the type that occurred after the 2008 collapse of U.S. investment bank Lehman Brothers.

Moody's ratings agency has downgraded the standing of seven Portuguese banks, despite the fact that they had passed the stress tests. It said the decision had been determined by the lowering of Portugal's national debt to junk status earlier this month.
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    Rikard Jozwiak

    Rikard Jozwiak is the Europe editor for RFE/RL in Prague, focusing on coverage of the European Union and NATO. He previously worked as RFE/RL’s Brussels correspondent, covering numerous international summits, European elections, and international court rulings. He has reported from most European capitals, as well as Central Asia.