Brussels, 07/07/2011 (Agence Europe) - After downgrading Portugal's credit rating, US credit rating agency Moody's said in the evening of Wednesday 6 July that 26 European banks would fail the stress tests being run by the European Banking Authority (EBA). “Of the 91 EU banks subject to the EBA's 2011 stress test, Moody's believes that 26 rated banks have a heightened risk of needing extraordinary external support. Moody's notes that the EBA's 2011 stress assumptions do not assume a sovereign default at a time when the risk of a sovereign default within the euro area has increased”, it explained in a press release. Moody's says the stress tests will have a range of positive benefits like major increases in bank capital within the European Union, as has been seen with the current restructuring of Spanish savings bans, and will increase transparency with the publication of banks' exposure to sovereign debt. Last week, Reuters said that between 10 and 15 European banks would fail the stress tests.
European finance ministers will be meeting on Tuesday 12 July, when they will be briefed on the test results before they are published by the EBA, possibly at the end of next week. This will give the ECOFIN Council time to ensure that member states have introduced sufficient “financial backstops” to ensure struggling banks are able to raise capital on the financial markets or, failing that, for the state to bail them out.
The 2010 bank stress tests showed up problems at seven banks (5 in Spain, 1 in Germany and 1 in Greece, see EUROPE 10187). The tests were slammed because two Irish banks sailed through them only to default and force Ireland to go cap in hand in search of international financial aid. To shore up credibility, the EBA made the 2011 tests tougher, seeing how banks would survive a hypothetical collapse in eurozone GDP of 0.5% (see EUROPE 10340). Taking on board the solvency ratios set out in the Basel III Agreement (which will only fully come into force in 2019), the EBA has been strongly criticised by the German banking regulator, but the fact that the EBA refuses to countenance the hypothetical default of a eurozone country in the stress tests is controversial. Moody's says that the 2011 tests do not cover the risk, of a country defaulting at the very time when the risk of a eurozone country doing precisely that is increasing. Faced with the persistence of the eurozone sovereign debt crisis, the EBA did, however, ask banks last month to assess their sovereign debt risks in the same way as they assess their portfolio credit risks. (M.B./transl.fl)