13 Europe banks flunk test, need extra 10 billion euros

FRANKFURT, Germany – The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and need an extra 10 billion euros ($12.5 billion) to cushion themselves against any future crises.

Although the landmark review identified only a handful of weak banks, ECB officials said Sunday it was tough enough to ensure Europe’s banks will be purged of the bad investments that have made some of them hold back on lending.

That means the banks will be ready to lend to businesses when the economy finally picks up, they said.

“The results guarantee that going forward the economic recovery will not be hampered by credit supply restrictions,” said ECB Vice President Vitor Constancio.

Yet after months of talk about banks that were “zombies” – walking dead, too weak to lend – it appeared unlikely that any would be put out of business by the review’s results.

The ECB, working with the European Banking Authority, checked the worth of banks’ holdings in a so-called asset quality review and subjected the banks to a stress test that simulates how their finances would fare in an economic downturn.

The ECB said 25 banks were found to need 25 billion euros. Of those, 12 had already made up their shortfall during the months in which the ECB was carrying out its review, which was based on bank finances at the end of 2013. They found money by issuing new shares or by shedding risky investments or loan businesses that reduced the amount of capital needed to backstop those holdings.

The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers and up to nine months to actually carry out the plan.

The hope is that by then, the banking system will be healthy enough to support, not hinder, the economy of the 18-country eurozone. The currency bloc did not grow at all in the second quarter, after four quarters of weak recovery.

As it prepares to become the eurozone’s banking regulator, the ECB is under pressure to show its review will be more effective than similar tests carried out by the EU in 2010 and 2011 that gave a pass to banks that later needed bailouts. It had more information because it started with a thorough review of bank holdings and used tougher financial definitions.