Eight banks out of 90 failed the European Stress Tests, five in Spain, two in Greece and one in Austria. Sixteen banks are close to failing, defined as below the 5% capital ratios for the next two years. Another German bank would have failed, but they refused to disclose their data.
Banks were allowed to cheat and raise capital months before the actual test:
For the 2011 exercise, the EBA allowed specific capital increases in the first four months of 2011 to be considered in the results. Banks were therefore incentivised to strengthen their capital positions ahead of the stress test.
In spite of raising €50 billion in 2011 before the tests, 8 banks failed anyway with 16 being damn close to failing. Without the raising of additional capital cheat, 20 banks would have failed. The test involved a lowering by 4% of GDP, but no exposure to sovereign default. From the EBA press release:
The scenario assesses banks against a deterioration from the baseline forecast in the main macroeconomic variables such as GDP, unemployment and house prices – for instance, GDP would fall 4 percentage points from the baseline. The scenario includes a sovereign stress, with haircuts applied to sovereign and bank exposures in the trading book and increased provisions for these exposures in the banking book. Changes in interest rates and sovereign spreads also affect the cost of funding for banks in the stress. The stress testing methodology, which was published by the EBA on March 18th, 2011, entails a static balance-sheet assumption, and also does not allow the banks to take actions to react to shock. The resilience of the banks is assessed against a benchmark defined with reference to capital of the highest quality -- Core Tier 1 (CT1) -- set at 5% of risk weighted assets (RWA).
But the tests didn't include a real default, instead a 25% writedown on sovereign bonds:
European Union regulators’ stress tests on the region’s banks include a 25 percent writedown on Greek government bonds. The market has already driven down the price of 10-year Greek debt to 52 cents on the euro.
Regulators didn’t include the possibility of a sovereign default in the tests even though credit-default swaps indicate about an 87 percent chance that Greece won’t be able to repay its debts. The tests included a 22.3 percent writedown on Portuguese 10-year securities, while they currently trade at 54 cents per euro.
The €2.5 billion amount to shore up the failed banks is fiction, according to Bloomberg:
The bad news is that banking regulators say the eight test flunkers will need to raise a mere 2.5 billion euros ($3.5 billion) in fresh capital by year-end. How can that be bad news? Because the number lacks credibility. Almost no one believes that’s all it will take to shore up Europe’s troubled institutions, especially if Greece or another of Europe’s fragile economies defaults on its debt, which looks increasingly likely.
S&P has a much more dire figure, €250 billion, or about $350 billion USD.
The fact that five Spanish banks failed is also more dire, for Spain put up 95% of it's financial sector in raising capital, other nations, 60%.