–Adds Quotes, Detail To Version Transmitted At 1714 GMT
–ECB Vice President Says Tests Were Severe, Rigorous
–ECB To Continue To Provide Unlimited Liquidity If Needed

BRUSSELS (MNI) – Seven European banks failed tests to prove they
could weather a mild recession or bout of severe market turbulence and
as a result need to raise more capital, the Committee of European
Banking Supervisors (CEBS), said on Friday.

Five Spanish banks, one German bank and one Greek bank didn’t meet
the requirements of the tests, CEBS said, in an exercise designed to
shore up investor confidence in the EU banking sector, by proving that
most of the regions banks had enough capital to withstand future shocks.
In total, they need E3.5 billion in additional capital to meet the
minimum 6% tier one capital ratio that the tests required, CEBS said.

The stress tests are “severe, rigorous and very comprehensive,”
European Central Bank Vice President Vitor Constancio told reporters at
a press conference after the release of the results.

“They show the resilience of the EU banking sector and the tests
themselves are a big contribution to financial stability in the EU,” he
added.

Constancio said the European Central Bank would continue to provide
“unlimited liquidity” to Europe’s banks, if they needed it, as has been
its policy throughout the financial crisis.

In total, the EU tested 91 of its banks, constituting 65% of all
banking assets.

Spain’s Espiga, Diada, Banca Civica, Cajasur and Unnim failed the
tests, along with Germany’s Hypo Real Estate and Greece’s ATEbank.

Those banks should “take the necessary steps to reinforce their
capital positions through private-sector means and by resorting, if
necessary, to facilities set up by Member State governments, in full
compliance with EU state-aid rules,” the Committee of European Banking
Supervisors, the European Central Bank and the European Commission said
in a joint statement.

In a joint statement, the CEBS, the ECB and the European
Commission, said they welcomed the level of disclosure that EU banks had
agreed to provide.

“Such disclosures ensure transparency regarding conditions in the
EU banking sector,” the statement said.

“The adverse scenarios used in the stress test are designed as
‘what-if’ scenarios reflecting severe assumptions which are therefore
not very likely to materialise in practice,” the statement said.

“Accordingly, the results of the test confirm the overall
resilience of the EU banking system to negative macroeconomic and
financial shocks, and are an important step forward in restoring market
confidence,” it concluded.

Europe’s policymakers hope that the publication of these results
will have the same effect as similar ones carried out in the US last
year, which prompted 10 banks to raise additional capital and were
widely credited with giving the sector a much-needed boost.

But investors may want more evidence that EU banks have been tested
stringently enough.

Analysts were skeptical of the decision of the treatment of banks’
sovereign debt holdings, with the stress test haircuts only applied to
the banks’ trading books and not its bank books.

Gary Jenkins at Evolution Securities said “the majority of these
(sovereign) bonds are held on the banking books” adding the favourable
approach to sovereign debt is “consistent with the EU’s comments that no
EU sovereign will be allowed to fail.”

“We have not included a default of any country,” ECB’s Constancio
admitted. “We have not done that, because we don’t believe there will be
a default.”

He said each of the 91 banks had revealed, during the course of the
exercise, its exposure to the sovereign debt of each EU country, much
more information than had been disclosed before.

“The information is there if the market wants,” he said. “You must
criticise the assumptions of the tests, not the results.”

Europe’s policymakers say it is unfair to compare the EU and US
stress tests because the US tested its banks before they’d raised any
capital, whereas the European tests come after many banks have increased
their capital ratios by taking government funding or raising capital in
the markets.

“I think that the these stress tests are the most extensive and the
most severe that have been conducted in industrial countries,”
Constancio said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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