Only eight European banks out of 90 fail stress tests, but many are skeptical of results

Only eight out of 90 European banks failed so-called stress tests that assessed their ability to weather another economic downturn, while an additional 16 barely squeaked by and will have to bolster capital, according to results released Friday by the European Banking Authority.

The eight failing banks, all relatively small ones, included five from Spain, two from Greece and one from Austria, according to the Wall Street Journal. They fell short of the amount of capital considered necessary for them to survive in a two-year economic downturn.

A ninth bank, Helaba of Germany, would have failed but refused to provide the data necessary to do the analysis, according to the New York Times.

The 16 banks that just barely passed, as well as the eight that failed, will be required to shore up their finances, in most cases by bolstering reserves. The EBA can't force the banks to raise enough capital or take other steps to shore up their condition; that responsibility lies with each individual country's government, according to the Associated Press.

The test of the system, and a step toward restoring confidence in the European banks, many say, lies in whether the individual governments will enforce the requirements that the EBA results dictate.

The tests simulated what would happen to the finances of the banks in a recession, where growth falls more than 4 percentage points below EU forecasts, while at the same time housing prices drop and unemployment rises, according to the Associated Press.

The small number of failing banks was met with skepticism, and criticism that the test had been lax. The strongest critique of the process was that it didn't factor in the possibility of a default by Greece in a worst-case scenario assessment of the banks' health, according to the New York Times:

The test results come amid rising anxiety that Greece is on the verge of defaulting on its debt, an event that could provoke a banking crisis because so much of those bonds are parked on the balance sheets of European financial institutions. As a result, the stress tests have clear implications for the overall health of the euro zone.

The EBA's explanation on Friday for so few banks failing the test was that it had given them the opportunity to raise capital between the time the test began, in early March, and the release of the results on Friday, the Associated Press said.

The European regulator tried to make the test this year more rigorous after a problem last year when stress tests failed to discover problems with Irish banks, which collapsed shortly afterward, the Associated Press said.

According to the New York Times:

Analysts had been skeptical that the tests this year were rigorous enough to clear up doubts about the European banking system and to encourage institutions to begin lending to each other again rather than relying on the European Central Bank for funds.