July 18, 2011, 11:03 / Finance

Europe's peripheral banks perform suspiciously well in stress tests

Spanish and Italian banks showed good results in European stress tests that ended last week. According to the Financial Times, this is an unexpected result that may reduce the pressure on banks that has been growing recently.

The European Banking Organization, which conducted stress tests, found a total capital deficiency of 2.5 billion euros in only eight banks (five Spanish banks, two Greek and one Austrian). The results fueled criticism that stress testing was not stringent enough, especially because it did not take into account the risk of default on Greek bonds. Another bank, the German Landesbank Helaba, also failed the stress tests, but refused to make its results public.

Investors who have reviewed stress test results and banking organization data say the health of banks such as BBVA and Santander in Spain or Intesa Sanpaolo in Italy could provide temporary support to markets. Banks have been hit by fears of their governments defaulting on their government debt and have recently had difficulty raising short-term financing at affordable rates.

"The stress test results showed differences between banks that have strong assets and funding and those that don't," said Credit Suisse banking analyst Daniel Davis.

The degree of stability of European banks and their ability to cope with possible losses in the event of defaults of one of the eurozone countries is a key point in negotiations between major bankers and European leaders on the issue of restructuring Greek debts. German Chancellor Angela Merkel on Sunday said she would attend Tuesday's European summit in Brussels only if an agreement was reached to resolve the Greek crisis, which she believes should involve private creditors. “The more voluntary participation private creditors take, the less there will be a need for additional measures to solve the problem,” Merkel said, again opposing a formal deferment of repayments.

The best positions according to the results of stress tests were found in banks with the smallest volume of loans issued to creditors (for example, the Spanish Banca March) and some financial institutions, for example the Irish Life and Permanent, which was purposefully pumped with funds from the country’s financial assistance package from international lenders. Scandinavian banks were in good positions.

Among the European blue chip banks, the Spanish banking group Banco Bilbao Vizcaya Argentaria (BBVA) passed the best stress tests, with a first-order core capital adequacy ratio of 9.2% (the minimum level must be 5%) even after simulating various economic problems, for example, a decline in GDP, rising unemployment, falling real estate prices. Intesa was in second place with a coefficient of 8.9%, in third place was the Dutch ING with an indicator of 8.7%, the French Credit Agricole - 8.5%, and Santander - 8.4%.

The tests were failed by the Spanish Banco Pastor, Catalunyacaixa, Unnim, Cam and Caja3, the Greek Agricultural Bank of Greece and Atebank, and the Austrian Volksbanken. Another 16 European banks passed the stress test requirements with a minimum margin.

Banking analysts at Credit Suisse believe that BBVA, HSBC and Intesa will also top the ranking even if stress tests are carried out using a more realistic model. However, experts still have questions about the quality of stress tests, including incomplete data from some banks on foreign loans.