8 banks flunk controversial European stress test

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Controversial: European banks stress test
A stress test conducted by the European Banking Authority (EBA) on 90 European Banks for the estimation of their performance in a recession like scenario, saw 8 banks failing the tests ,while 16 banks just cleared the tests by a small margin. However, there is doubt that the test results will be enough to bring back investor faith in the financial system of the debt ridden Euro-zone area. The tests were insufficient as they failed to capture the projected performance of the banks in a scenario of a likely default by Greece.

The tests revealed the relatively weaker banks, with the banks failing the test being asked by the EBA to raise an aggregate $ 3.5 billion to boost their capital, while the 16 banks that just cleared the test were recommended to increase their capital in the next few months.

The worst performing banks were from Spain, with five banks such as Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Group Caja3 failing the test and seven others just getting over the line. The two banks from Greece that failed the test were EFG Eurobank and state-owned ATEBank. The list of failures included Austria's Oesterreichische Volksbank AG.

Another shortcoming of the test was that the EBA did not include provisions as a part of the bank's capital. The Spanish and German authorities raised serious doubts about the creditability of these results and said that they may not ask their banks to take any action. The results will only be important if the banks are asked by their respective governments to take action and raise additional capital. The EBA does not have authority to make banks take any action.

The simulated data included the scenarios such as the growth rate slipping by more than 4 percent from what has been projected by the Eurozone, a 0.5 fall in economic output in the current year and 0.2 percent next year. The other inputs were the fall in housing prices and rise in jobless rates.

Read more about: bank, stress test, european union
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