ECB Detects EUR 25 Bln Capital Shortfall At 25 European Banks

(RTTNews) - The European Central Bank on Sunday published the results of a thorough year-long examination of the resilience and positions of the 130 largest banks in the euro area as of 31 December 2013. The comprehensive assessment found a capital shortfall of 25 billion euros at 25 banks. The assessment consisted of the asset quality review or AQR and a forward-looking stress test of the banks.

Twelve of the 25 banks have already covered their capital shortfall by increasing their capital by 15 billion euros in 2014. Banks with shortfalls must prepare capital plans within two weeks of the announcement of the results. The banks will have up to nine months to cover the capital shortfall.

No major bank failed the tests. Failures were concentrated among Italian banks, with nine failures, and Greek and Cypriot banks, with three apiece. Among the largest is Banca Monte dei Paschi di Siena SpA, Italy's third-largest lender, which faces an outstanding capital hole of about 2.1 billion euros.

"This unique and rigorous exercise is a major milestone in the preparation for the Single Supervisory Mechanism, which will become fully operational in November. This unprecedented in-depth review of the largest banks' positions will boost public confidence in the banking sector," said Vitor Constancio, Vice-President of the ECB.

"By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth."

The AQR showed that as of end-2013 the carrying values—or book values—of banks' assets need to be adjusted by 48 billion euros, which will be reflected in the banks' accounts or prudential requirements. In addition, using a standard definition for non-performing exposures, the review found that banks' non-performing exposures increased by 136 billion euros to a total of 879 billion euros.

The comprehensive assessment also showed that a severe scenario would deplete the banks' top-quality, loss-absorbing Common Equity Tier 1 (CET 1) capital—the measure of a bank's financial strength—by about 263 billion euros. This would result in the banks' median CET 1 ratio decreasing by 4 percentage points from 12.4 percent to 8.3 percent. This reduction is higher than in previous similar exercises and is a measure of the rigorous nature of the exercise.

Since the announcement of the exercise in July 2013, the largest 30 participating banks have undertaken various measures, including capital raising to an amount of 60 billion euros, to strengthen their balance sheets by a total of more than 200 billion euros, the ECB said.