13 European banks flunk test, must fix finances

The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and must increase their capital buffers against losses by 10 billion euros ($12.5 billion).
The ECB said 25 banks in all were found to need stronger buffers — but that 12 have already made up their shortfall.

The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.
The ECB checked the worth of bank holdings and subjected banks to a stress test that simulates how their finances would fare in an economic downturn. The exercise is aimed at strengthening the banking system so it can provide more credit to companies and boost the weak European economy.

The asset review and stress tests pave the way for the ECB to take over on Nov. 4 as Europe’s central banking supervisor. The test is supposed to make sure hidden troubles in the system are fixed before landing in the ECB’s lap.
The ECB’s new role is aimed at strengthening the euro currency union by toughening oversight of banks and keeping their troubles from dumping large losses on national governments’ finances through bailouts. The ECB is taking over as supervisor for the biggest banks from national supervisors who were considered to be too likely to take it easy on their home banks and not step in to ward off problems. National supervisors will still look after smaller banks.

The test is also aimed at weeding out so-called zombie banks who are too crippled by hidden losses to make new loans to companies and have stayed in business thanks to tolerance from national supervisors and by rolling over loans that aren’t being repaid.
Banks are key to the functioning of the European economy because they are where most firms — especially small and medium-sized ones — go for the credit they need to expand and operate. In the United States, companies turn more often to financial markets by selling bonds to raise money.

Improving the flow of credit is key to getting the European economy out of its stagnation. The 18 countries that use the euro currency showed no growth at all in the second quarter, after four quarters of weak recovery from a crisis over too much government debt.