Roughly one in five of the eurozone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday, Oct 26, according to Reuters.
Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros ($12.7 billion) to be raised.
Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds. The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi had the largest capital hole to fill at 2.1 billion euros.
The exercise provides the clearest picture yet of the health of the eurozone's banks more than seven years after the eruption of a financial crisis that almost bankrupted a handful of countries and threatened to fracture the currency bloc, Reuters says.
While 25 of the eurozone's 130 biggest banks failed the health check at the end of last year with a total capital shortfall of 25 billion euros, a dozen have already raised 15 billion euros this year to make repairs.
A recent investor survey by Goldman Sachs found they believed the ECB ought to ask lenders to raise an additional 51 billion euros of capital for the tests to be credible.
European Central Bank Vice President Vitor Constancio said the results could encourage banks to lend.
"There is some pick up (in demand), but it is still slight," Constancio told Reuters. "All this now can really start to change the environment and we hope it will also change the reality."
Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013.
The exercise provided a snapshot of banks' vital statistics and forced them, for example, to revise the amount of risky loans – which have not been serviced in 90 days – upwards by 136 billion euros to 879 billion.
The exercise, which saw officials trawl through more than 40 million individual bank figures, had two parts – a strict review by the ECB of assets such as loans, followed by a wider test of how banks would cope with a new economic crash.
It is the fourth attempt by Europe to clean the stables of its financial sector and has been billed as much the most rigorous.
In total, the ECB said banks had been valuing their loans and assets at 48 billion euros more than they are really worth. This was because they had not recognized 136 billion euros of bad loans.
That accounted for 11 billion of the 25 billion euros banks were collectively short of at the end of last year. It also eroded 37 billion euros of capital amongst the banks that passed.
