Europe's banking sector clears stress tests

All the biggest European banks passed the Committee of European Banking Supervisor's stress test with seven small, unlisted government-controlled banks failing in results that were broadly as anticipated by experts.

As per the results announced the Tier 1 capital ratios of seven banks would fall below 6 per cent should they be exposed to severe adverse conditions through 2010 and 2011. Though the current minimum regulatory threshold is 4 per cent but the assessing body, the Committee of European Banking Supervisors (CEBS), used 6 per cent as a stress threshold.

The 6% level was the same number used by the US in its stress tests last year and has now become a widely accepted indicator of the financial resilience of banks.

The banks that failed to clear the worst case scenarios were Spain's Cajasur, Espiga, Unnim, Diada and Banca Civica, Greece's ATEBank and Germany's Hypo Real Estate. All of the banks are under state control.

Europe's largest listed banks by assets, including the UK's Royal Bank of Scotland Group Plc (RBS), Barclays Plc and HSBC Holdings Plc, France's BNP Paribas SA and Credit Agricole SA, Germany's Deutsche Bank AG and Spain's Banco Santander SA, all said they cleared the tests comfortably with plenty of leeway in their Tier 1 capital ratios to take on even the worst of the scenarios projected by the assessors.

These included the possibility of the economy shrinking in the next 18 months, as well as sharp rises in short-term interest rates and one-year government bond yields.