Citigroup Says 24 Banks Would Fail Test if Bonds Held on Books Included

Twenty-four of Europe’s biggest banks would fail the region’s stress tests and show a combined capital shortfall of 15 billion euros ($19.4 billion) if the exams included losses on sovereign bonds held on lenders’ banking books, according to Citigroup Inc.

The banks’ Tier 1 capital ratios would fall below 6 percent, which was the threshold set by European regulators for passing, Ronit Ghose and other Citigroup analysts said in a note to clients today. The banks that failed the Citigroup assessment include 12 Spanish banks, seven from Greece and Cyprus, three German lenders and one bank each from Italy and Ireland.

Regulators carried out stress tests of the European Union’s 91 largest banks to examine if the region’s financial firms could withstand an economic slump and a sovereign-debt crisis. The test showed seven lenders failed and exposed a combined capital shortfall of 3.5 billion euros. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity. That ignored the majority of banks’ holdings of sovereign debt, analysts have said.

Citigroup said it used the stress-test data and applied an additional discount on banks’ sovereign-debt holdings in the banking books. Eighty-five banks provided breakdowns of their government-debt holdings when they published the test results, Citigroup said. The six that didn’t are all German banks and include Deutsche Bank AG, the country’s biggest bank, according to the analysts.

Banking Book

The tests, organized by the London-based Committee of European Banking Supervisors, didn’t factor in losses on sovereign bonds in the banking book as regulators didn’t assume a European nation would default on its debt -- a prerequisite for impairments on banking books, according to analysts.

Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley.

The EU stress tests assumed a loss of 23.1 percent on Greek debt, 14 percent on Portuguese bonds, 12.3 percent on Spanish debt and 4.7 percent on German state debt, according to CEBS. U.K. government bonds were subject to a 10 percent discount and France 5.9 percent, CEBS said.

To contact the reporter on this story: Jann Bettinga in Frankfurt at jbettinga@bloomberg.net.

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