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Spanish banks pass stress tests

07-26-2010 08:41 BJT

by Paul Mielgo

MADRID, Jul 25 (Xinhua) -- Spain's financial bodies have cleared doubts concerning their ability to withstand a worsening financial crisis after getting relatively good grades in the European Union (EU)-wide bank stress tests, whose results were published last Friday.

Among the 27 Spanish financial institutions (nine banks and 18 savings banks) participating in the tests, only five savings banks fail to reach an adequate solvency level in a highly unlikely scenario of extreme economic adversity.

Spain is the only EU member country to have 95 percent of its financial bodies tested, compared to an EU average of 65 percent, and thus resulted in its having the most failed banks among the 91 tested.

The government hopes the results can restore market confidence in the banking system, which has suffered severely in the global economic crisis and the real-estate market doom.

All nine Spanish banks were graded with the first rate capital ratios. Banca March was the best valued institution achieving a 19 percent Tier 1 ratio (capital level plus reserves) for 2011 in the worst of simulated scenarios. Santander, BBVA and La Caixa were close behind, all three comprising almost two thirds of the Spanish banking sector.

Governor of the Bank of Spain Miguel Angel Fernandez Ordonez felt satisfied with the results and said the stress tests confirm the banking sector's solvency.

He said the scenario of economic deterioration created in the tests is "highly unlikely" and in "normal and foreseeable" conditions, the Spanish financial system is solid.

"The outcome is that the Spanish banking system enjoys solidity and that the process of restructuring the country's savings banks has also been justified," he added.

The tests try to evaluate the probable solvency of financial institutions according to three variables: the evolution of the GDP and unemployment in 2010 and 2011, and of short-term interest rates.

The scenarios simulate a strong fall in the GDP, an increase in unemployment and defaults, a 28 percent reduction in the price of newly built real-estate assets, and a fall in the cost of public debt.

The results are compiled in the Tier 1 ratio, which reflects the capital, reserves and preferential shares a financial institution may have at its disposal when faced with any of the assumed risks.

According to the tests, institutions should have a minimum of 6 percent to face a complicated situation with some comfort, even though the minimum legal requirement is 4 percent.

Nevertheless, the five failed banks, some of which have recently merged with political support, would need more capital in case the economy drastically deteriorates and a crisis of sovereign debt emerges.

Among these institutions, some have already received funding from the national fund scheme which has overseen the restructuring of Spain's financial sector (FROB).

Overall, Spanish savings banks which have failed in the stress tests will need more than 1.83 billion euros (2.36 billion U.S. dollars). If the public funds already allocated for the restructuring process are added to this figure, the total will amount to 18.26 billion euros (23.58 billion dollars).

Spain's Finance Minister Elena Salgado described the results of the stress tests as "satisfactory" and "excellent", saying that the largest of the institutions affected by the tests, Caixa Catalunya, hardly represents "2.3 percent of the Spanish financial sector". He is confident that the markets will positively respond to the results.

Also on last Friday, the European Commission authorized the extension of the FROB scheme until Dec. 31 which officially expired on June 30.

The Spanish government has requested this extension to cover additional capital requirements among the banks and savings banks examined by the stress tests.

Salgado assured that the FROB scheme, which was entrusted with a debt capacity of up to 99 billion euros (127.82 billion dollars), is "very capable" to meet the financial needs of Spanish institutions.

As the International Monetary Fund (IMF) had previously warned, Spanish savings banks will face capital needs of 17 billion euros (21.95 billion dollars) and the banks will require a further 5 billion euros (6.45 billion dollars) in a "stressed scenario".

The figures will be considerably lower in a normal situation, Salgado said.

"We have already devoted 11 billion euros (14.19 billion dollars) from the FROB scheme and another 3 billion (3.87 billion dollars) from the Deposit Guarantee Fund. We are therefore very close to the figure which the IMF predicted," he added.

Editor:Xiong Qu |Source: Xinhua

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