bne -

Central and Eastern European banking systems are in a fit state to stand up to another bout of crisis, stress tests released on October 26 predict. Overall, 25 of the 130 lenders that were tested failed, but the problems are very limited, providing a shot of confidence for the EU economy.

The weak economies dubbed the PIIGS were back to haunt regulators as they led the list of problematic banks in the asset quality review (AQR) by the European Central Bank and the European Banking Authority's (EBA) stress tests. Of the 25 banks whose liquid capital falls below the limits required to withstand the crisis scenarios, nine are Italian, while Greece and Cyprus have three strugglers each. Banks in Ireland, Portugal and Spain, as well as Belgium, Germany and France, were also earmarked.

Out of the 19 Eurozone banking systems tested (Lithuania, which joins the single currency zone next year was included), only the Italian, Greek and Cypriot systems failed to reach both the minimum base and adverse case thresholds. Those lenders that fail will need to raise capital, either via divestment or additional share issues. The total needed is estimated at almost €10bn.

Meanwhile, the Slovenian system failed the adverse scenario. Slovenia, which last year was battling to avoid an international bailout provoked by spiralling bad loans in the state-owned banking sector, was the only CEE country to see any of its lenders fail. The Bank of Slovenia quickly insisted both banks, NLB and NKBM, will cover the shortfall from profits, having boosted their financial performance this year. 

Worries that Erste (http://www.bne.eu/content/story/cee-bad-loans-may-make-austrian-banks-st...), the second largest lender in CEE region, would fail the test proved unfounded. The concern was that non-performing loans in Southeast Europe and losses in Hungary might have hit its capital buffers. That could have provoked worries over the stability of the sector across CEE.

However, the only Austrian bank to fail was the rump Volksbanken, which was not a great shock. An Austrian banking source told bne earlier in October that the lender, formerly Austria's fourth largest, was most at risk. However, it sold its large CEE bank network to Russian state giant Sberbank in 2012, and continues to seek to spin off smaller businesses such as insurance across the region. The Vienna-based Sberbank Europe (formerly Volksbank International) and fellow Russian state giant VTB Bank will have to pass the ECB tests from next year.

The tests are a prelude to the ECB's takeover of supervision of the Eurozone's largest lenders on November 4. Yet despite over two dozen banks reported to be set to struggle to maintain capital in the face of simulated stress, only 13 will now need to raise additional capital, the ECB reported. The other 12 already raised €8.9bn this year in a bid to shore up their buffers. The tests suggests the rest need to find €9.5bn.

Analysts at Daiwa suggest the tests should help boost confidence across the EU. "The results of the exercise were largely positive in terms of their assessment of the assets and capital of European banks, which along with the recently introduced ECB liquidity support and asset purchases, should help reduce further obstacles to the credit supply channel. But a marked acceleration in bank lending cannot be expected against a backdrop of weak demand growth. As such this is a step towards the rehabilitation of the euro area economy. But it is no panacea."