Seven European banks fail "worst-case' tests

Stress tests of 91 banks across Europe to gauge their ability to weather a new financial storm have revealed seven failures, regulators said today

The Committee of European Banking Supervisors (CEBS) - the London-based umbrella body for Europe's financial regulators - carried out the tests on banks representing 65 per cent of total European banking assets.

CEBS said total bank losses under its scenario of lower-than-expected growth and increased sovereign credit risk would amount to 566 billion euros (£472 billion).

The UK's "big four" - Barclays, HSBC and their part-nationalised counterparts Lloyds Banking Group and Royal Bank of Scotland - all passed the tests easily.

These banks have already been subjected to tough stress tests by the UK's Financial Services Authority (FSA) last year. The FSA said: "This resilience is a result of the considerable work that has been undertaken to strengthen UK banks in recent years."

HSBC's chief executive, Michael Geoghegan, said the pan-European exercise was "a timely and important contribution to building investor and market confidence and supporting financial stability".

Lloyds Banking Group - which is 41% owned by the taxpayer - said it had a "robust" capital position following its fundraising exercise last year.

The British Bankers' Association said: "UK banks have already put in the work to rebuild their businesses and put more money aside against future financial problems. It is no surprise to find they have exceeded the standards set out by CEBS."

The CEBS's "adverse scenario" covered a three percentage point fall in growth from the EU's forecast over the next two years - a double-dip recession - as well as a sovereign debt shock, although there have been some doubt expressed over the rigour of the tests.

The banks which failed were Germany's nationalised Hypo Real Estate, Greece's ATE and five regional Spanish banks or "cajas" which were hit by the collapse of a Spanish construction and property boom.

These banks will have to raise billions more in capital to shore up their balance sheets, although the regulator stressed that failure to pass the test under an unlikely "what-if" scenario did not mean that the institutions were insolvent.

CEBS said: "For the institutions that failed to meet the threshold for this stress test exercise, the competent national authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalisation."

Chris Turner, head of FX strategy at ING Bank, said the outcome of the tests was "pretty much in line with expectations".

He added: "The CEBS appears to have delivered reasonably rigorous methodology in an attempt to instil confidence. What can be said is that today's stress test release does not appear to have uncovered any 'skeletons in the closet'."