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Home » Online Forex Trading Blog » Euro Bank Stress Tests Shaky

Euro Bank Stress Tests Shaky


While the world has one eye on the extension of the U.S. debt ceiling, the euro zone has its own problems and they could well signal the exodus from a single currency system.  Eight of 90 banks that submitted to the stress tests failed to pass.  Participants are forced to reveal their profit forecasts, a listing of their sovereign bonds and their continuous funding costs.  While 8 banks absolutely failed the tests, another 7 are in need of capital.

The stress test utilized a 5 percent core capital level as the standard.  Banks were subjected to a theoretical dip in stocks, bonds and property prices during the recession.  The eight banks that failed must submit a plan to raise the needed capital by September of this year.  All these institutions will need to raise 2.5 billion euros to pass the test.

Five banks in Spain, 2 banks in Greece and one bank in Austria comprise the list of failing banks.  An additional 16 banks passed the test but by less than 1 percent.  Bank examiners wrestled with what to do about the sovereign debt held by all Euro zone banks.  These 16 on-the-edge banks have been advised to boost their pure capital.  If Greece, Ireland Portugal, Spain or Italy fails, there will be immense pain throughout the region.   Examiners requested that each bank list the volume and location of their euro zone bonds.

The European Banking Authority (EBA) estimates that if Greece fails the banks would have a 15 percent exposure to worthless bonds.  Germany attacked the EBA’s standards as one bank failed to participate in the stress test but all other 15 banks passed.  Germany and France hold most of the Greek debt.

Unrest In Germany

As was observed by a CNBC commentator, the euro zone is in dire straights.  There is not a sense of a one-for-all or all-for-one in the mix.  German taxpayers are especially vehement in their protests and they are disgruntled with their Chancellor, Angela Merkel.

German Banks expressed disagreement with the regulators from the EBA.  The bank’s complaint with the EBA is that the tests only instruct banks to mitigate cash shortfalls and implement either a mandatory restructuring or raise pure equity.

Germany’s financial institutions are regarded as the most solid in the region.  47 percent of Germans want Greece expelled from the euro zone.  However, Italy’s request for bailout funding has also met bitter resentment in Germany.  68 percent of the German taxpayers view Italy as a much bigger threat to the concept of a single currency.  Germany’s Finance Minister, Wolfgang Schaeuble reiterated his feeling that Greece was endangering the euro.

If Spain needs a bailout, the EU does not have the funding to avoid default.  Italy may have the same effect.  The Germans are tired of loaning their funds to Greece, Portugal and Ireland.  Early in the recession, the fear of contagion has never really been addressed.  It was always suspected that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) would be unable to implement enough austerity cuts to deal with their debt. 

The euro has fallen sharply to $1.41 this week.  At one point, the value was a slow as $1.38.  The conditions in the PIIGS may well cause the return to national currencies.

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About the Author -

Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses. Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.

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