Health check finds 24 EU banks ailing – but the UK’s pass muster

Jill Treanor, City editor
The Guardian

Despite clean bill of health, Lloyds Banking Group will face scrutiny when it outlines plans to cut up to 9,000 jobs

Lloyds passed the stress test narrowly. Photograph: Hannah Mckay/EPA

Britain’s major banks have passed a Europe-wide health check – although Lloyds Banking Group will face scrutiny on Tuesday when it outlines plans to cut up to 9,000 jobs and axe branches under a three-year plan intended to bolster its profitability.
Although Lloyds, which is 24% owned by UK taxpayers, passed the examination of 123 banks published by the European Banking Authority, it stressed that it would have scored higher if its capital had been measured in the same way as other major European lenders. The UK’s three other main high street banks, Royal Bank of Scotland, Barclays and HSBC, also passed the tests.

The results of the stress tests – which 24 EU banks failed – were released as the UK’s major banks prepare to publish their third-quarter results. The first will come on Tuesday from Lloyds, whose boss, António Horta Osório, is to outline a three-year strategy to bring in new technology and cut costs.
The EBA had tested the balance sheets of banks at the end of 2013 for a number of scenarios such as a rise in unemployment, declining economic growth and falling house prices, and imagined how they might look in three years’ time. It concluded that 24 of them needed to raise a total of €25bn of extra capital.
None of the UK’s banks needed to do so. Lloyds beat the threshold of a 5.5% capital ratio – the key measure of financial strength used by the EBA – coming in at 6.2%, with RBS at 6.7%, Barclays at 7.1% and HSBC at 9.3%.
But if the European banking regulator had not assumed that the costs of spinning out its TSB subsidiary would recur every year, its capital ratio would have been 9.6%, Lloyds claimed. The bank said the “significant progress” it had made was not reflected in the results, which highlighted differences in approach taken by the Bank of England and other national regulators across the EU.
The Bank of England will publish the findings of its own stress tests of the UK’s banks on 16 December and stressed that the findings of the European banking regulator should not be used as a barometer of its own results.
“It is important to note that the EBA results should not be interpreted as indicative of the UK results, nor can the results of the UK stress test be inferred from the EBA results, because although the EBA stress test and UK variant stress test are complementary, there are a number of significant methodological differences between the two,” the Bank of England said.
Andrea Leadsom, the City minister, said the results of the EBA showed that government reforms were working. “A key part of our long-term economic plan is to strengthen UK banks so that they can support the economy, help businesses and serve customers,” she said.
Threadneedle Street is continuing with its own stress tests, and the European Central Bank (ECB), which takes over the regulation of banks in the eurozone on 4 November, has also reviewed the quality of the assets held by banks.
This so-called asset quality review of 130 eurozone banks found that assets of €48bn had been overvalued by the lenders, and the ECB also found that there were another €136bn of bad loans sitting in banks.
An additional bank – Liberbank of Spain – failed the ECB tests while passing the EBA exam.
Among the countries whose banks failed the EBA tests were Italy, with nine failures, Greece and Cyprus, with three each, and Ireland and Germany. But while the EBA found that 24 had failed, this dropped to 10 when their efforts to raise capital and other measures were taken into account, leaving banks to find €9.5bn.
For instance, the three Greek banks that failed submitted plans to restructure themselves to the ECB after the start of the test period. However, only one of them – Eurobank Ergasias – would have failed had these restructuring plans been taken into account. In Cyprus – bailed out in March 2013 when its banks were on the brink of collapse – finance minister Harris Georgiades said the results of the stress tests could lead to a more rapid easing of capital controls imposed to stop depositors taking their money out of the country.
While there is an urgent need for these remaining banks to make up the shortfalls, as many as 40 banks would need to find ways to raise capital to meet a higher threshold that will be imposed in four years’ time. Then the minimum is likely to be 7%.
Analysts at Société Générale warned that more needed to be done. “A handful of European banks need less than €10bn in capital between them,” the SocGen analysts said. They went on to warn that this “gives the impression of being a relatively lightweight exercise”.
“Bank equity should be boosted by additional transparency, and some ‘potential fails’ are likely to rally on the clarity. There is also welcome support for the build-up of capital in the system. Overall, the market must now move on to the bigger problems of credit demand and the lingering prospect of deflation – which will take more determined efforts from governments to fix,” the SocGen analysts said.
Banks had been raising more capital before the stress tests than they did before the previous tests held in 2011, when eight banks out of 90 failed and 16 only passed by the skin of their teeth