25 lenders set to fail ECB’s health-check

Twenty-five lenders in the European Central Bank’s euro-area bank health check are poised to fail the regulator’s Comprehensive Assessment, according to a draft communique of the final results seen by Bloomberg News.

One-hundred-and-five banks are shown passing the review, according to the draft statement. Of the lenders that failed, about 10 will still face capital shortfalls they need to plug, according to a person with knowledge of the matter, who asked not to be identified because they weren’t authorized to speak publicly. That figure is likely to change as talks continue before the final results are published Oct. 26, said the person.

The two-part review forms one pillar of the ECB’s effort to rekindle confidence in the eurozone after half a decade of financial turmoil. ECB president Mario Draghi has said banks need to fail to prove the losses of the past have been dealt with. After two previous European stress tests didn’t reveal problems at lenders that later failed, the ECB has staked its reputation on getting this exercise right.

“The numbers are consistent with our expectations,” said Alberto Gallo, head of European macro-credit research at Royal Bank of Scotland Group Plc in London. “It’s too early to say the exercise is credible. The key will be to see how much stress the strong banks will take, and how many of them will pass by a narrow margin.” He expects 11 banks will need to plug capital gaps after measures already taken this year.

To pass the Asset-Quality Review, which scrutinizes the asset side of balance sheets as of Dec. 31 last year, banks need common equity Tier 1 capital equivalent to at least 8 percent of risk-weighted assets. In the adverse stress test, the pass mark is 5.5 percent.

“The ECB can’t comment on speculation about the outcome of the comprehensive assessment,” the ECB said in a statement. “Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final.”

The euro region’s largest banks will show a 6 billion euros ($7.6 billion) capital gap in the ECB’s assessment, according to analysts at Citigroup Inc. led by London-based Ronit Ghose. The shortfall would be 15 billion euros when excluding capital banks raised this year, with failures concentrated in Greece, Italy, Spain and Ireland, they wrote. (Bloomberg)