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EU banks may face $582 billion in losses

02 October 2009 10:12 (UTC +04:00)

Bakuâ€“ APA-Economics. Major European banks won an all-clear Thursday from a stress test by financial supervisors that showed none of them would collapse if the economy worsens, AP reported.

European Union finance ministers and central bankers said in a statement that the bloc’s 22 biggest banks were likely to face an extra â‚¬400 billion ($581.5 billion) in losses this year and next year if economic output fell below recent forecasts â€” but none would go under.

"Large banks appear sufficiently capitalized to head off a severe macroeconomic deterioration," they said after talks in Goteborg, Sweden.

The head of the European Central Bank, Jean-Claude Trichet told reporters that "our system is resisting in a way that is reassuring." Germany’s top central banker, Axel Weber, described the test as giving banks "an assured all-clear."

The EU statement said the banks had benefited from recent strong earnings and government financial support. EU states have laid out billions of euros (dollars) to recapitalize troubled banks and to guarantee or purchase problems assets such as securities that have slid in value.

The EU banks the test examined would jointly keep their capital buffers above a key global standard of banking health, they said. Worldwide Basel II banking rules recommend a Tier 1 capital ratio of at least 4 percent. No EU bank would go beneath 6 percent, the tests showed, and on average would remain above 9 percent.

Trichet said the test assumed that economic output would contract by 5.7 percent this year and by 2.7 percent next year in each country where the banks operate. The European Commission’s most recent estimates forecast the EU economy to shrink 4 percent in 2009 and to grow around 0.4 percent in 2010.

The International Monetary Fund warned this week that European banks are behind those in the U.S. in recognizing impaired assets and still have more losses to report over the next 18 months as they write down the value of such investments.

It expects banks in the 16 nations that use the euro currency to write down loans and securities by some $814 billion from 2007 to 2010. In addition, British banks are likely to write down $604 billion in the same time frame, it says.
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Trichet said the IMF estimates had "no contradiction" with the EU stress test because they were operating "in a different universe," using different scenarios and including past losses.

EU governments said banks should continue strengthening their financial position and maintain lending to companies and other private borrowers.

They also said national supervisors should follow up with individual banks. The stress text only examined the banking system as a whole â€” based on just the 22 largest crossborder banks in the 27-nation bloc.

The governments did not name the banks and do not plan to publish details of the test.

French Finance Minister Christine Lagarde said she would like the tests to be carried out regularly and become "routine business so that we can all be in check and control how safe and solid the system is."