Seven banks cannot meet capital requirements in Euro stress tests

HSBC Bank

HSBC Bank was one of the many banks tested in the European stress tests. Image from Wikimedia Commons.

After the Greek debt crisis began to wreak havoc in European financial markets, a series of stress tests were devised to see whether European banks could handle any further shocks. After the tests were administered, it was determined that seven major European banks could not handle further strains as they did not have sufficient reserves to handle another crisis. Some nations in the European Union bloc that pledged aid in the Greek debt crisis fared better than others. However, the seven that did not meet capital requirements were from 91 banks that were tested.

The Insufficient Seven

The banks that did not meet the capital requirements were Hypo Real Estate Holding AG in Germany, ATEBank in Greece, and Unnim, Espiga, Diada, CajaSur and Banka Civica, which are all Spanish, according to the Wall Street Journal. These seven banks were unable to keep enough of Tier 1 capital, or cash reserves equal to 6 percent of the worth of their total assets. The onus behind the tests was to make sure the banking sector could withstand any more shocks to the European financial system, in case one or more governments defaulted on any debt that they held.

Walking a fine line

Stress tests like these cannot be too stringent nor too lax. The idea is to restore confidence among investors and lending institutions so that normal lending and lending between banks will resume. The European Central Bank, according to the New York Times, is trying to keep from having to make any more bailout loans to banking institutions and get them to start lending to each other again. If the tests are too lax, no one will believe the results. If the tests are thought to be too strict, then the entire European banking system will appear to be on the verge of collapse.

More Euro loans in the Euro Zone

European lending is constrained, and until the Greek crisis is resolved, the European Union is going to be somewhat credit constrained. The Euro had been valued lower against the dollar as a result of the ongoing turmoil, but recent uncertainty of U.S. recovery is leading to the dollar beginning to slip slightly.

Further Reading

Wall Street Journal

New York Times

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