Stress tests will not solve euro banks’ bad loan crisis, says Fitch

Tim Wallace
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Banco Espirito Santo, endorsed by Real Madrid’s Cristiano Ronaldo, failed this summer
EUROPEAN banks will still struggle with huge piles of bad debts despite hiking capital levels, dragging on the recovery, analysts at Fitch warned yesterday.

Banks raised €65bn (£51bn) of capital in the first half of the year to bolster their buffers ahead of the European Central Bank’s (ECB) stress tests to show they could withstand another downturn.

But that did not mean they were now healthy, Fitch warned.

“We estimate it would cost around €70bn to raise reserve coverage of impaired loans for all banks undergoing the assessment to 60 per cent,” said Fitch. “Upping coverage to a very solid [and arguably conservative] level of 80 per cent would cost around €235bn. We certainly do not expect this much capital to be injected into the system during the next few years.”

Despite hopes that the worst of the crisis was over, Portuguese bank Espirito Santo failed this summer. Most of the remaining problems were in Greek, Spanish, Irish and Italian banks, the analysts said.