March 21, 2012 / 6:00 PM / 6 years ago

Big European banks seen able to pass U.S. stress tests

FRANKFURT, March 21 (Reuters) - Europe’s largest banks would have passed a U.S.-style stress test, unlike some of the country’s own lenders, analysts say, although investor confidence in the sector remains shaky after the region’s sovereign debt crisis.

Exact comparisons between the U.S. and European health checks for their respective banking sectors are difficult to calculate because of the differing methodologies involved.

Under the U.S. test, banks were required to show they could maintain a 5 percent tier one common capital ratio during a stressed scenario.

This was based on a 5 percent decline in real gross domestic product (GDP), an unemployment rate of 13.1 percent, a 52 percent drop in stock prices and a 21 percent drop in home prices.

Four of the 19 U.S. banks tested, including Citigroup , failed.

However, Barclays analysts, who crunched the numbers for some of Europe’s biggest banks to make a comparison, said they would have been given a clean bill of health.

“We believe the 14 large European banks we cover have enough capital in aggregate to pass a representative version of the U.S. stress test,” analysts at Barclays said in a report released this week.

Of the group tested, only Britain’s Lloyds would fail to meet the minimum capital requirement after applying trading losses and loan losses, the Barclays note showed.

The other European banks, which include Deutsche Bank , Credit Agricole, BBVA, BNP , Santander, UBS and Credit Suisse , have an average tier one common ratio of more than 10 percent, giving them some leeway to absorb the kind of stresses envisoned under the U.S. test, Barclays said.

U.S. bank shares soared shortly after the United States Federal Reserve announced the results of the test which freed up some lenders to begin dividend payouts and share buybacks.

European banks have escaped far more lightly.

Only eight of a total 91 European lenders failed a European test last July. But in October the European Banking Authority (EBA) identified a 114.7 billion euros ($151.3 billion) capital shortfall after testing 71 European banks.


Barclays analysts said the European capital shortfall test in October was tougher because it demanded lenders increase the minimum core tier one capital ratio to 9 percent while applying market prices to sovereign bonds.

“In our opinion, the October European bank stress test was more challenging than the recent U.S. bank stress test,” analysts at Barclays said.

This view is at odds with a general perception among market participants that the U.S. stress test is the stiffer of the two.

Despite this, restoring confidence in the European bank sector following new stress tests in 2013, will be tough, because a pan-European approach is less able to reflect a clear picture about the state of Europe’s lenders, analysts said.

“Since the pan-European stress tests were trying to use a common approach across such a diverse range of banks they didn’t end up differentiating sufficiently to reassure the market,” said Morgan Stanley analyst Huw van Steenis.

Although stress tests should reflect the differences in asset quality, capitalisation and funding, the need to check 90 lenders in 21 countries forces European regulators to dilute the test to a lowest common denominator.

“We felt the capital hurdle in the European periphery should be higher than the core, given the differences in the economic outlook,” Van Steenis said.

The way forward for Europe is to continue with national tests, which are better at providing a “warts and all” picture, Van Steenis said.

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