European Central Bank stress tests, aimed at discovering how well Europe’s banks would react in a fresh economic crisis, have given the thumbs up to Portugal’s banks.
According to its in-depth analysis, Portugal’s banks would fare a lot better in a financial crisis than counterparts in Spain, Greece, Italy, Ireland and even Germany.
The so-called stress tests, designed to take the temperature of Europe’s banks, were carried out on 91 banks in 20 countries.
Portuguese banks clocked up on average 8.43% in a Tier 1 ratio, meaning the ratio of their own funds, common stock, disclosed reserves and preferred stock as against funds lent out.
Before the crisis, many banks struggled to have 4% Tier 1 ratios. Now they are required to have at least 7-10% on average.
The scenario looked at a combination of external macroeconomic shocks in terms of market and credit risk, including sovereign default risk (the risk of a country going bankrupt and failing to pay the interest on loans) and losses in pension funds.
Tier 1 Spain, which saw five of its smaller regional Caja banks fail the test, scored an average of 7.51% in terms of own funds.
The Greeks, also Tier 1, managed 7.38 %, Italy 7.2% and Ireland trailed behind at 6.8%.
The countries with the best average score in terms of deposit thresholds were Poland (15.40%), Hungary (13.40%), Finland (12.30%), Denmark (11.90%) and the United Kingdom (11.08%). Portugal came in at 12th place in the ranking of 20 countries but of all the Portuguese banks only BPI (Banco Português de Investimento) managed to get a Tier 1 ratio of over 10% at 10.1%.
The other Portuguese banks, Caixa Geral de Depósitos (8.2%), Millennium bcp (8.4%) and BES (6.9%) fell short of the most desired 10% safety net but generally met the 8% threshold.
The result means, in theory, that Portugal’s banks would be able to withstand another recession or crisis.
But some critics have said that such a high pass rate will inevitably raise questions over the credibility of the tests – and whether they were stressful enough.
Carlos Costa, the new Governor of the Bank of Portugal (BdP), said he was “pleased with the result” which showed Portugal’s banks had the capacity to withstand a crisis.
The Finance Minister, Fernando Teixeira dos Santos, said that Portuguese banks were “robust” and were “blessed with the necessary capital to safely face an adverse scenario” and added that it was yet another reason “to be confident in our banking system”.
The President of BPI, Portugal’s most penny-pinching bank, said that his bank’s results in the ranking tables showed “a certain prudence” and an “adequate conservative strategy” that has “placed the bank up front to meet such challenges”.
Chris Graeme
