Nearly one in five eurozone banks is still on shaky financial foundations, the ECB said Sunday after a crunch audit aimed at preventing a repeat of the crisis that nearly led to the euro's collapse.
The European Central Bank's financial health check has become more pressing in recent weeks as the eurozone is seen to again be tottering on the edge of recession, with fears of deflation rising and economic growth in its biggest economies stalling.
Even Germany, which had been doing well with exports, is staring down slowing growth on the back of weak investment. "This unprecedented in-depth review of the largest banks' positions will boost public confidence in the banking sector," said ECB vice president Vitor Constancio, adding that "this should facilitate more lending in Europe, which will help economic growth."
A total 25 of the 130 banks flunked the audit, the ECB said, although none of them were among world leaders. The worst results were concentrated in Italy, where some nine banks failed, as well as Greece and Cyprus with three each.
The Italian banks included Banca Monte des Paschi -- the country's third biggest -- and Banca Popolare di Milano. In Germany, the small Muenchener Hypothekenbank failed, and in France it was the little-known CRH Caisse de refinancement de l'habitat that flunked.
The European Commission praised the tests as "robust exercises, unprecedented in scale and among the most stringent worldwide". It said the assessments will "provide a high level of transparency on EU banks' balance sheet and data exposure as of end-2013 and allow the identification and redress of any remaining vulnerabilities".
The goal was that financial institutions "can again provide affordable lending to the real economy, to households and SMEs (small and medium enterprises) in particular".
'€25 bn capital shortfall'
The banks showed a combined capital shortfall of 25 billion euros (about $31 billion) as at the end of 2013. Twelve of the 25 failing banks however have already covered their capital shortfalls this year, raising their capital by 15 billion euros, the ECB said.
Banks with shortfalls must prepare capital plans within two weeks and have up to nine months to cover the gaps. As part of the audit, the ECB also reviewed the quality of bank assets to make sure they were accurately valued.
Here, it found that the banks would need to write down another 48 billion euros in asset value. It also pointed at 136 billion euros in troubled assets, known as non-performing loans.
The audit was carried out ahead of the ECB assuming the role of Europe's banking supervisor on November 4. The idea was that a "comprehensive assessment" -- made up of a so-called asset quality review (AQR) and a "stress test" -- will uncover any potentially nasty surprises beforehand.
After all, previous banking stress tests in Europe, the latest in 2011, failed to expose serious problems in a number of key financial institutions.
In fact, some were given a clean bill of health only to need rescuing just months later. The stress tests were carried out by the European Banking Authority (EBA) in London, which ran the banks through two different economic scenarios to see if their balance sheets are healthy enough to withstand further economic shocks.
Under a baseline scenario, a bank's core capital ratio, a measurement of financial strength, must not fall below 8.0 percent. In the adverse scenario, it must not fall below 5.5%.
Daniele Nouy, the head of the new single supervisory authority within the ECB, said the audit -- for which some 6,000 staff were mobilised -- was "an excellent start in the right direction".
"It bolstered transparency in the banking sector and exposed the areas in banks and the system that need improvement."