13 European Banks Fall Short in ECB Stress Test

FRANKFURT - Banks in Europe are 25 billion euros, or about $31.7 billion, short of the money they would need to survive a financial or economic crisis, the European Central Bank said on Sunday. That conclusion was a result of a yearlong audit of eurozone lenders that is potentially a turning point for the region's battered economy.

The E.C.B. said that 25 banks in the eurozone - including nine in Italy and three in Greece - showed shortfalls in their own money, or capital, after a review devised to uncover hidden problems and to test their ability to withstand a sharp recession or other crisis. No major European banks failed the central bank's test.

The review looked at banks' books through the end of 2013. Of the 25 banks, 13 have still not raised enough capital to make up the shortfall, the central bank said.

The highly anticipated assessment of European banks was intended to remove a cloud of mistrust that has impeded lending in countries like Italy and Greece and left the eurozone struggling to avoid lapsing back into recession. By exposing a relatively small number of sick banks - of the 130 under review - the central bank aims to make it easier for the healthier ones to raise money that they can lend to customers.

Italy had by far the largest number of banks that failed the review, with nine, of which four must raise more capital. Monte dei Paschi di Siena, whose troubles were well known, must raise €2.1 billion, the central bank said, the largest of any individual bank covered by the review.

Greece's banking system was also hard hit, with three banks found short of capital. One, Piraeus Bank, has since raised enough capital to satisfy regulators. The other two are Eurobank, which must raise €1.76 billion, and National Bank of Greece, which must raise €930 million.

The overall capital shortfall for the banks under review was in the middle of analyst estimates. However, the review also uncovered €136 billion in troubled loans that banks had not previously reported. In addition, banks had overvalued their other holdings by €48 billion, the E.C.B. said.

The banks with insufficient capital have two weeks to present a plan to the central bank to make up the shortage. Capital is the money banks use to do business that is not borrowed and therefore available to absorb losses. If the banks are unable to find enough fresh capital, they could be forced to shut down.

In addition, even banks that will not be required by the E.C.B. to raise capital may find themselves under market pressure to do so, especially those that the E.C.B. found had been overly optimistic about the values of their holdings.

The number of banks had been known since Friday, after a draft of the central bank's report began circulating. But the size of the shortfall and the scope of overvalued assets had not been previously disclosed.

Results of a parallel review by a second regulator, the European Banking Authority, which included banks in Britain, Sweden and other European Union countries outside the 18-member euro currency bloc, were also announced Sunday.

The results of those stress tests were largely in line with the European Central Bank's review. None of the banks that the authority's stress tests found at risk were outside the eurozone. In Britain, the major banks all passed the stress test comfortably.

For the most part, Germany's banks fared well in both reviews - which is crucial because of the outsize role the German economy plays in the Eurozone.

Münchener Hypothekenbank was the only German bank that failed to meet the capital requirements as initially measured by both tests. But the bank has since raised capital and no longer faces a shortfall, according to the European Banking Authority.

French lenders, whose balance sheets account for about 30 percent of eurozone banking assets - second only to Germany's - had an 'excellent' showing, Christian Noyer, the governor of France's the central bank, said at a news conference Sunday in Paris.

The European Central Bank audit, conducted by 6,000 civil servants and outside consultants, was also a test for the central bank and its ability to handle its new function as supreme bank supervisor for the eurozone. Previous stress tests by different regulators, which examined fewer banks and relied heavily on information from the banks' national supervisors, were unconvincing because banks that had passed later ran into serious problems.

Still, if investors and analysts decide that this new test was still too easy for banks to pass, it would be a setback for both the European Central Bank and the eurozone economy.

Harald A. Benink, a professor of banking and finance at Tilburg University in the Netherlands, said that if the exam was seen as insufficiently rigorous, the eurozone could suffer the same stagnation as Japan, whose government has been faulted for not forcing banks to confront their problems.

'We may be heading in the same direction in Japan in not cleaning up the banks,' said Mr. Benink, who spoke before the release of the results on Sunday. 'It will impede the ability of banks to finance the economy in the future.'

If investors and analysts deem the review a success, however, it could be a watershed moment in the eurozone crisis. The audit was a prelude to the creation of a banking union overseen by the European Central Bank, a move that supersedes the Balkanized financial system that has prevailed since the euro currency went into use in 1999.

The central bank will formally become the eurozone's so-called single supervisor on Nov. 4.

Danièle Nouy, who will head the central bank's new regulatory arm, said in a statement that the findings of the review would 'enable us to draw insights and conclusions for supervision going forward.'

Yves Mersch, a member of the central bank's executive board, called the new governance 'a sea change in Europe's banking markets.'

'For the first time,' Mr. Mersch said in Brussels last week, 'common legislation and rules will be applied by a single authority, strongly increasing transparency and banks' comparability across countries.'

The central bank disclosed the results on a Sunday so that markets would have a chance to digest the data before reopening on Monday. But given the recent volatility in the financial markets, the timing of the disclosure is still not ideal. Turmoil in stock markets could make it more difficult for banks to issue new shares as a way to raise capital.

Still, some pickup in bank lending after the tests is almost inevitable. Bank executives complained that the burden of complying with European Central Bank demands during the review had drained resources and impeded their ability to make loans. Now that the exam is over, they should be able to get back to business.

The eurozone consists of 18 of the European Union's 28 member countries. After Lithuania joins in January, there will be 19 countries that use the currency and whose banks will be subject to the central bank's oversight.

Britain, which still uses the pound, is among the European countries that have chosen to remain outside the eurozone.

Chad Bray contributed reporting from London and David Jolly from Paris.