‘Good result for BOV’

“Resolute action to address investor perceptions of sustained weakness in the EU banking sector is an important part of the comprehensive response to the crisis, as endorsed by the European Council,” Finance Minister Tonio Fenech said on Friday, referring to the EU-wide stress test carried out on 91 banks.

The objective of the tests was to assess the resilience of the EU banking system to adverse shocks. A stress test, which is a regular element of the supervisory toolkit, is not a forecast. Its purpose is to provide a means of assessing the resilience of participating banks to solvency pressures under a plausible but unlikely scenario of stress. In this way, the results provide a measure of whether banks are sufficiently capitalised to weather adverse economic and financial conditions that go well beyond the likely outcomes.

In Malta, one bank – Bank of Valletta – directly participated in the EU-wide stress test.

Mr Fenech acknowledged the results of the test and welcomed the enhanced transparency in the publication of the test results and the disclosure of the sovereign exposures of participating banking groups. “Malta is committed to safeguarding financial stability and to contributing to further enhancing the resilience of the banking sector as part of a comprehensive EU-wide strategy,” he said.

The results of the test indicate that BOV is adequately capitalised, with CT1 ratios significantly above the five per cent benchmark under the stress scenario.

‘Good result’ for BOV

Bank of Valletta was once again selected to represent the Maltese banking sector in this test.

The test result is expressed in terms of the Bank’s “Core Tier 1 ratio.” This ratio, which relates shareholders’ funds to risk-weighted assets, is the measure used internationally to evaluate the resilience of banks. BOV’s stressed Core Tier 1 ratio was calculated at 10.4 per cent, which is significantly above the “pass mark” ratio of five per cent and the statutory minimum ratio of four per cent.

BOV chairman Roderick Chalmers commented that this was a “good result” for BOV and represented the latest external confirmation and endorsement of the strength and resilience of the bank and its balance sheet, even under extreme conditions. BOV, he said, has passed this year’s stress test “with relative comfort”, as it had done a year ago.

“The bank’s strength is the result of prudent capital management, a cautious risk appetite and the adoption some years ago of a responsible and sustainable dividend payout policy,” said Mr Chalmers. “Stress tests on capital and liquidity buffers are a regular part of our internal risk management processes, which help us to safeguard the stability of the bank in an environment that continues to be marked by competition and uncertainty.”

Mr Chalmers described the result as “a credit to Malta and its prudent regulatory regime, to Bank of Valletta, and to the local financial services sector in general.” He concluded by thanking the bank’s customers for their continuous support, and the executive team and staff for the dedication and professionalism with which they carry out their duties.

8 banks flunk controversial European stress test

Eight out of 90 European banks flunked stress tests projecting how they would fare in another recession, and 16 more barely passed – but analysts doubted that Friday’s results would succeed in restoring confidence in the continent’s shaky financial sector.

Some countries challenged the results as being inaccurate and overly pessimistic, saying they would not force their weaker banks to raise new cash. Economists warned that the tests were insufficient because they did not simulate the main risk hanging over Europe, a default by Greece.

While markets were sanguine about the results – the euro barely moved – experts questioned whether the tests achieved their goal of restoring confidence in a sector that is carrying billions of bad debt from crisis-hit countries such as Greece, Ireland and Portugal.

“The publication of these results will not assuage investors’ fears over the resilience of the EU banking sector,” said Marie Diron, senior economic adviser for Ernst & Young.

She said the tests were useful to single out particularly weak banks, but noted that a national debt default was “the single greatest risk facing the European banking sector at present.”

As it presented the results, the European Banking Authority said the failing banks should quickly raise a total of €2.5 billion ($3.5 billion) to boost their capital cushions. The banks that barely passed were also asked to shore up their finances in coming months.

Spain, commonly seen as the next-weakest link in the 17-country eurozone, fared by far the worst in the tests. Five banks – Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Group Caja3 – failed the test outright, while seven others barely scraped by. However, the number of banks that Spain tested was far higher than in any other country.

The next in line was Greece, with two lenders – EFG Eurobank and government-owned ATEBank – failing the tests and two others almost failing.

Austria’s Oesterreichische Volksbank AG was the only lender outside the crisis countries to not pass, though German Landesbank Helaba pulled out of the tests earlier this week, saying the EBA refused to take into account some of the capital it had set aside.

The European banking regulator’s decision to not count certain types of capital for its stress scenarios has come under fire from several countries and could become a major hurdle for the tests’ credibility.

“I refuse to accept that the five failed the test,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said on Friday, insisting that none of the Spanish banks had had to raise extra funds.

He complained that the EBA had refused to count general provisions, money that Spanish banks are required to set aside for a crisis such as the one envisioned in the stress tests.

German officials also questioned the tests’ results, saying they saw no reason for any of their banks to take action, even though two – HSH Nordbank AG and Norddeutsche Landesbank – fell into the “barely passed” category.

Nordbank and Norddeutsche Landesbank both challenged the stress test results, saying they didn’t reflect how strong they were.

The EBA lacks the power to force banks to raise more capital – whether from investors or governments – or to make them merge or sell businesses. Only their national governments can do that, and analysts say the key to the stress tests is whether governments act on the results.