THE BLOG
10/26/2014 03:36 pm ET Updated Dec 26, 2014

24 European Banks Fail EBA Stress Test: Is a Major Banking Crisis Looming?

The European Banking Authority, in conjunction with the European Central Bank, conducted a stress test of 123 leading banks within the European Union. A total of 24 banks failed the stress tests, which gauges the ability of a bank located within the EU to withstand macroeconomic pressures, which are rapidly accumulating not only in Europe but throughout the global economy. This represents a full 20 percent of all the major banks subjected to the stress test by the EBA and ECB.

Nine of the banks with failing grades are Italian; three are Greek and another three are Cypriote. Though only one of the banks on the list of vulnerable banks is Irish (Ireland had previously been afflicted with a major banking crisis, requiring a massive bailout), that institution, Permanent TSB, is one of Ireland's largest financial institutions. Permanent TSB was found to have a massive €854.8 million hole in its reserves. Overall, the EBA found that the banks surveyed in the stress test were short of 24.6 billion euros in capital reserves--the amount required in their modeling to withstand a three-year recession. This is the equivalent of 31.17 billion U.S. dollars at current exchange levels.

Since the global economy imploded into systemic crisis in 2008, central banks and regulating authorities in major economies throughout North America and Europe have held periodic stress tests, apparently in an effort to reassure the public in those countries that their banks are in generally good financial condition. There is a suspicion among many that those stress tests are often rigged in a manner designed to present the most favorable indication possible regarding those banking institutions. The fact that this most recent stress tests undertaken by the EBA reveals that 20 percent of the European Union's major banks are in trouble, and this at a time of economic stagnation throughout Europe, with increasing indications of looming recession, should serve as a warning klaxon on how fragile Europe's financial health remains a full six years after the onset of the global economic and financial crisis.