Eight banks fail EU stress test

15 July 2011 Last updated at 19:34 GMT Banks both inside and outside the eurozone were tested. Eight out of 90 European banks have failed stress tests designed to ensure they can withstand another financial crisis.

The European Banking Authority (EBA), which carried out the healthcheck, said another 16 banks were in the danger zone.

The EBA called on national financial regulators to ensure that capital shortfalls would be quickly resolved.

Five Spanish banks failed, as well as one in Austria and two in Greece.

On Wednesday, Germany's Helaba pulled out of the stress tests, effectively making it the ninth bank to fail.

Eight banks named

In Austria, the Oestereichische Volksbank failed the test, while in Greece two state-controlled banks - ATEbank and EFG Eurobank - fell at the hurdle.

In Spain, Catalunya Caixa, Pastor, Unnim, Caja3 and CAM failed, with seven others just scraping through the test.

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Banks will be under pressure to build their capital buffers, regardless of how they fared in the stress test”

End Quote Jason Karaian Economist Intelligence Unit However, Bank of Spain governor Miguel Angel Fernandez Ordonez said there was no need to inject further capital into the banks as the sector was already undergoing a fundamental restructuring.

The EBA added that 16 banks only just passed the tests. All the banks should "promptly" take steps to strengthen their financial cushion, the EBA said.

After the EBA announcement, the Bank of Portugal said two of the country's banks would immediately begin bolstering their finances.

Banco Comercial Portugues, the country's largest listed bank, and Espirito Santo Financial Group, will strengthen their balance sheets within three months.

Debt-heavy Portugal took a 78bn euro (?68bn) bail-out earlier this year. Its economy is forecast to contract 4% over the next two years.

The news came just as Italy's parliament approved a 70bn euro austerity package. The country's central bank said that all Italian banks had passed the tests with "an ample margin".

Default

A key benchmark for passing the test was whether the banks have at least 5% "core tier 1" capital, which describes the best form of capital a bank can hold to make up any losses.

One analyst told the BBC that, while some people would find the results reassuring, others would see them as evidence that the tests were not credible.

He said that demands from the financial authorities that banks began immediately to bolster their core capital "is an acknowledgement that there is a risk of sovereign default".

The failed banks would have to find an estimated 2.5bn euros in new funding by the end of the year, he said.

German bank Helaba disputes the way the authorities carried out its assessment

But analyst Jason Karaian of the Economist Intelligence Unit said that the total extra funding needed by banks would be far higher in the long run.

"Given that the markets are rewarding safety and security over growth and risk, banks will be under pressure to build their capital buffers, regardless of how they fared in the stress test.

"In the end, it would not be surprising to see hundreds of billions of euros raised in the coming quarters, with the most frenzied activity centred on banks with the greatest exposure to the euro area's wobbly periphery," he said.

As expected, the four UK banks passed the test - Royal Bank of Scotland, HSBC, Barclays and Lloyds Banking Group.

The Financial Services Authority said: "The results support our own stress tests and we are pleased that the major UK banks have capital above the minimum required in the test, reflecting the work we and the banks have undertaken to improve resilience since the crisis."

Stringent

The tests are a key element in fighting Europe's debt crisis, intended to identify weak banks and ensure they are made robust enough to survive a possible default on government bonds by heavily indebted countries such as Greece.

However, the tests did not consider the impact of Greece defaulting, something some analysts believe is increasingly likely.

There have been concerns, including from the ratings agency Standard & Poors, that the tests were not strict enough. However, the EBA said they were more stringent than those it carried out last year.

In 2010, both Irish banks tested, Bank of Ireland and Allied Irish Bank, were given a clean bill of health. But just months later, AIB needed a government bail-out.

Each country's national banking regulators carried out a test that simulated what would happen to a bank's finances during a recession where growth falls more than 4 percentage points below EU forecasts.

On Wednesday, German bank Helaba withdrew from the stress tests to avoid public failure.

It said it would have passed the test if regulators counted a debt-equity hybrid, called "silent participation", as a capital reserve, but the EBA, having initially said it would accept this, then changed its mind.

"Under the EBA conditions the bank failed, that is clear," Helaba spokesman Wolfgang Kuss told the AFP news agency on Friday. "From our point of view we were successful," he added.

Meanwhile, the leaders of the 17 eurozone countries will hold an emergency summit next week in a bid to agree a deal on a second bail-out for Greece, the EU president announced Friday night.

Herman Van Rompuy called the meeting after disagreement over the contribution of banks and other private investors to a second rescue package.

The disagreement has overshadowed the financial markets, prompting some of the biggest share price falls for months.

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European banks 'can help Greece'

28 June 2011 Last updated at 08:39 GMT A 48 hour general strike is underway in Greece The boss of Italy's biggest bank says Europe's banks can work together with European institutions to help Greece.

"I think there is room for strong collaboration," said Corrado Passera, chief executive of Intesa Sanpaolo.

On Monday, French President Nicolas Sarkozy said French banks had agreed to extend their loans to Greece.

Eurozone officials are trying to find a way for banks to support Greece's bail-out without the country being judged to have defaulted on its debt.

Credit ratings agencies have warned that if banks agree to extend their loans to Greece, even voluntarily, they may judge it to be a debt default, which would cause even more problems for Greece.

President Sarkozy's idea was that when banks are repaid money they are owed by Greece, they should keep 30% of it, re-lend 50% of it to Greece for 30 years and put the remaining 20% into a special fund of high-quality bonds, which would insure them against a future Greek debt default.

French banks have the biggest exposure to Greek debt, while Italy has relatively low exposure.

The deal may be unpopular with Germany, because the new bonds would be insured by eurozone bail-out funds.

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There all manner of flaws and uncertainties in the scheme, according to bankers to whom I've spoken ”

End Quote Robert Peston Business editor, BBC News The French plan has yet to be agreed either with eurozone leaders or the Greek government.

BBC business editor Robert Peston says the real problem with the proposals is that there has been no attempt to reduce the amount of money that Greece owns, unlike in the Brady bonds for indebted countries such as Mexico, Argentina and Brazil, on which President Sarkozy's plans were based.

Nonetheless, German banks are reported to be very interested in the French model being discussed.

They were discussed by a group of international bankers, who met eurozone officials to discuss the crisis on Monday.

Also, the head of the eurozone's rescue fund, Klaus Regling, is talking to the ratings agencies to explore ways to avoid a second bail-out being considered a default.

European policymakers, notably the European Central Bank, are concerned that the bail-out could force European banks to recognise billions of euros in losses on Greek debts they currently hold, and could also trigger payouts on credit derivative contracts.

Credit derivative contracts are, in this case, bets that Greece will default on its debt. They are used partly as insurance by banks that have bought Greek bonds.

The Greek parliament is discussing a new range of austerity measures, which include introducing income tax on earnings of 8,000 euros (?7,142, $11,600), and is due to vote on the package later in the week.

The ruling party has 155 seats in a 300-seat parliament. Polls suggest the proposals are opposed by three quarters of Greece's 11 million population.

The austerity measures must be agreed before Greece can get its hands on the latest slice of the original 110bn euro support package.

A 48 hour general strike is underway in protest at the measures.

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Banks 'must lend more to firms'

23 May 2011 Last updated at 21:24 GMT Under the government's Project Merlin deal with banks lending was to increase significantly Business Secretary Vince Cable says he wants a "significant improvement" after data showed UK banks are behind track in their lending to smaller firms.

Bank of England figures show that in the first three months of 2011, the top five UK banks loaned ?16.8bn to small and medium-sized (SMEs) companies.

Under a deal with the government, the banks had agreed to lend ?76bn to SMEs in 2011 - equating to ?19bn a quarter.

The banks said that the latest data demonstrated a "determination" to lend.

However, Mr Cable pledged to examine "further action" if bank lending did not rise.

Under a deal called Project Merlin, Barclays, Royal Bank of Scotland, Lloyds, HSBC and Santander promised to lend ?190bn to businesses in 2011.

Of the ?190bn, some ?76bn of credit should be made available to SMEs this year, about ?19bn every three months.

But the de facto shortfall in the first quarter of 2011 was about 12%.

However, gross lending to all companies in the quarter was ?47.3bn, which means that the banks are on course to meet their overall target of ?190bn.

In a statement, the Merlin banks pointed out that these were still early days for the agreement.

However, many small firms report that a bank credit remains hard to obtain, with viable companies under threat because they cannot get loans.

Mr Cable agreed that just one quarter's figures were not conclusive, but said: "There is a serious problem with lending to good, small companies.

"We looked to the Merlin agreement to rectify the problem and... we want to see significant improvement over the next few months.

"We will monitor the banks' performance extremely closely and if they fail to meet the commitments they have agreed we will examine options for further action," the business secretary said.

Tax threat

The Merlin deal was finally thrashed out in February, after a protracted and difficult series of negotiations between ministers and banks over the lenders' role following the financial crisis.

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Members of the government say that they will not accept that the demand for loans from small business wasn't there”

End Quote Robert Peston Business editor, BBC News The agreement did not just cover bank lending, but also a reduction in bank bonuses and a promise by the banks to be more transparent about their pay packages.

The British Bankers' Association has repeatedly said that its members are doing all they can to increase lending.

A spokesman for the Merlin banks said: "These numbers demonstrate the determination of the Merlin banks to lend to viable businesses - it has been a solid start to the year.

"Whilst these numbers are encouraging, it is too early to draw conclusions as to the year-end outcome."

He added that demand for loans by small businesses had been "muted".

But the British Chambers of Commerce (BCC) called the figures "disappointing" and said the "crisis of confidence" between banks and businesses continued.

BCC director general David Frost said: "Many companies complain about strained relationships with banks both during and after the recession.

"Over-centralised processes, unclear decision-making and a lack of proper, local relationship management from banks, mean that in many cases, business customers have been put off applying for finance," he said.

'Ridiculous situation'

John Morgan, chief executive of Object Matrix, a software company based in Caerphilly, south Wales, told the BBC that his bank had recently turned down a vital overdraft request.

Small business owner John Morgan said he was unhappy with his bank

"I would say that the lack of funding from the banks is definitely holding us back from expanding," Mr Morgan said.

"When you cannot even get an overdraft facility to fulfil a firm order, you are in a ridiculous situation."

The Federation of Small Businesses said that a recent survey showed that widespread problems remained.

John Walker, FSB national chairman, said: "It is not surprising that the banks have not met lending targets to small firms.

"A recent survey of members of the FSB found that only 16% had approached the bank for credit and of those 44% had been refused," he said.

'Not working'

Shadow chancellor Ed Balls said the new Merlin data was "disappointing", telling the Communication Workers Union's annual conference that he had warned the agreement would be "weak and toothless".

He said: "Just at the time when we need small and medium-sized businesses to grow so we can get our economy moving again, it is worrying that bank lending to small businesses is falling short.

"It is early days, but three months on the signs are that the Project Merlin plan is not working."

But Downing Street said the lending agreement was for a year, and it expected banks to keep to their commitments.

The Prime Minister's official spokesman said: "Bank lending will move around during the year, clearly it will in part reflect demand.

"The purpose of these bank lending agreements was to ensure that there was sufficient supply of lending for families and for businesses and they were based on an assessment of what we thought would be required by the economy this year.

"We expect them to keep to those commitments over the course of the year," the spokesman said.

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Banks warned of Moody's downgrade

24 May 2011 Last updated at 08:52 GMT Watch: ETX Capitals' Manoj Ladwa says 'there is some weakness in the banking sector'

Fourteen UK banks and building societies have been told that their credit ratings may be cut because of the withdrawal of government support.

Moody's said on Tuesday it was reviewing banks including Lloyds and Royal Bank of Scotland, hitting the share prices of both firms.

Moody's sees less government support as possibly weakening the creditworthiness of some financial institutions.

A downgrade would raise borrowing costs for banks and building societies.

The Bank of England has already said that an emergency funding line - the Special Liquidity Scheme - will not be rolled over when it expires in January 2012.

Elisabeth Rudman, a Moody's senior credit officer, said: "The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government."

"It has been initiated in response to ongoing guidance from the UK authorities - the Bank of England, the Financial Services Authority and the Treasury."

The agency said that current levels of state support for the financial sector adds two to five notches of ratings uplift for the large UK banks and one to five notches of uplift for the smaller firms.

The ratings of Barclays and HSBC were not placed on review by Moody's.

Shares in Lloyds and RBS fell about 1%, but recovered slightly after the initial surprise at Moody's announcement subsided.

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Banks face 'intensive' regulation

19 May 2011 Last updated at 14:10 GMT Watch: Hector Sants says "regulators cannot rely on the judgement of the firms they supervise"

Banks have been told they will be much more strictly supervised by the new Prudential Regulation Authority (PRA).

The warning came from Hector Sants, the incoming boss of the PRA and the current head of the Financial Services Authority.

He told an audience of senior banking executives that they could not be relied on to avoid making mistakes that endanger the financial system.

He described the new approach as "close intensive engagement".

"Central to this supervisory model is the presumption that regulators cannot rely on the judgement of the management of firms they supervise, and must take their own view formed from their own analysis of the significant issues which affect the safety and soundness of the firm," said Mr Sants.

"Furthermore, where that judgement differs from that of the firm's management, the regulator must act," he added.

'Welcome step'

The decision to carve up the FSA was made by the newly elected coalition government last year after the financial crisis in 2007 and 2008 exposed problems with the regulatory regime.

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A decision has been taken for the PRA to publish all the regulatory data supplied to it by banks... so that banks' investors and creditors will be able see for themselves whether the banks are taking excessive risks.”

End Quote Robert Peston Business editor, BBC News The Treasury published a second formal consultation document on its plans in February this year.

The audience of banking executives was called to hear the latest thinking of the FSA and the Bank of England about how the new regulatory regime will work.

Andrew Bailey, who will be the deputy chief executive of the PRA, warned them that this would not involve trying to save insolvent banks at all costs.

"Key elements... will be to ensure that financial firms do business in such a way that adverse effects on the UK financial system are avoided and to minimise damage to the system in the event that a firm does fail," he said.

"We will seek to ensure that all firms it [the PRA] regulates can fail or be closed in an orderly manner with minimal impact on the financial system, consistent with the PRA's objective of promoting financial stability in the UK," he added.

Angela Knight, of the British Bankers' Association [BBA], said: "Today's announcement, setting out the authorities' approach to banking supervision in the future, is a welcome step forward offering a real opportunity to progress the lessons we have all learned to create a stronger regulatory framework for the future."

New regime

The PRA, which will be a division of the Bank of England, is being created next year to replace and improve on some of the functions of the Financial Services Authority, which is being closed down.

Continue reading the main story Big six UK banks: HSBC, Barclays, RBS, Lloyds TSB, Standard Chartered and the Nationwide building society.Big six UK subsidiaries of international banks: Credit Suisse, Goldman Sachs, Morgan Stanley, Santander, Nomura and JP Morgan.Big six UK branches of international banks: Deutsche Bank, UBS, JP Morgan, Credit Suisse, Credit Agricole and BNP Paribas.Source: FSA & Bank of EnglandResponsibility for supervising the way financial firms treat their customers will go to a separate Financial Conduct Authority (FCA).

The PRA will be responsible for supervising all banks, building societies and credit unions, plus insurance firms, amounting to more than 2,000 firms companies.

All of these will be subject to a minimum "baseline" level of supervision.

The joint FSA and Bank of England discussion document says that collectively the deposit-taking institutions functioning in the UK have worldwide assets worth about ?9 trillion - about seven times the total annual economic output of the UK.

So the PRA will concentrate its efforts on the small number of very large banks, including some investment banks, whose failure would have the biggest impact.

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