The European Central Bank announced Sunday that 25 big banks had failed its stress tests meant to identify weaknesses in the financial system.
Those banks face a capital shortfall of 25 billion euros, or roughly $32 billion, although their financial footing has improved.
The ECB revealed the results of its large-scale, year-long examination of 130 European banks Sunday in Frankfurt, Germany, as it is set to become the sole supervisor of big banks in the euro area in November.
Announcing the stress test results, ECB Vice President Vítor Constancio said that the findings would “guarantee that the economic recovery will not be hampered by credit supply restrictions coming from the banking sector, provided that there is enough aggregate demand.”
The tests, which simulate what would happen to banks in the case of a recession and financial market turbulence, showed special weakness in banks in Italy, where nine banks failed, as well as Cyprus and Greece. Of the 25 banks that failed, 12 had already taken steps to cover their capital shortfalls, the ECB said.
The stress tests also revealed that banks could be left hanging on 136 billion euros’ worth of loans that may not be repaid.
The stress tests included more banks and were more comprehensive than in past years in order to provide more confidence in banks’ strength as bank lending stagnates and the euro area economy teeters on the edge of recession. Previous tests had only failed half the number of banks, and had not identified weaknesses at banks that later did fail. The ECB is simultaneously engaged in bond-buying programs to spur lending as it aims to stave off the possibility of deflation. Euro area unemployment is more than 11 percent.