Individual Loans Are Also Stressing Europe's Banks

Europe's banks are sitting on vast amounts associated with lending options to individuals and businesses in cash-strapped European countries, highlighting how plain-vanilla loans, not just government debt, pose potential risks to this continent's bothered financial program.

The actual holdings are generally thorough throughout disclosures Europe's most significant banks made as part of the European Union 'stress tests,' whose results were announced Friday.

On their face, the European Union tests portrayed a surprisingly healthy banking system. Only eight of 90 lenders flunked the exams, seeing their capital cushions fall below 5% of their risk-adjusted assets under a simulated two-year economic downward spiral. Small amount of breakdowns persuaded a lot of specialists to be able to deride the particular checks while not being rough plenty of.

Nonetheless representatives together with the European union Banks and loans Recognition, a regulator that will executed this testing, consider that the best valuation of the actual exercises are the forest of information with regards to three or more,190 bits just about every traditional bank ended up being forced to disclose with regards to it is sense of balance bed sheet. That has precise country-by-country breakdowns of different types of loans and securities on their books.

During Europe's 15-month financial crisis, investor and analyst fears have centered largely on banks' holdings of sovereign debt issued by governments in financially shaky countries such as Greece, Ireland and Portugal. If those countries were to default, it could saddle banks and other holders of their bonds with big losses.

But Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt, and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow.

Banks tend to be holding far greater quantities of those commercial and retail loans than they are of sovereign debt, according to a Wall Street Journal analysis of disclosures accompanying the stress tests.

This year's stress tests represent the first time there has been a uniform way to measure these exposures. Until now, banks have disclosed their portfolios of loans to customers in troubled countries on a piecemeal basis. That made it virtually impossible to aggregate data across the industry or to compare different institutions.

'The country-by-country exposure [data] is better than any data we've seen before. We're very interested in the numbers,' said Alastair Ryan, a London-based banking analyst with UBS AG.

'It's giving me more things to be fearful of,' Ryan said, referring to the disclosures of some banks' large holdings of loans to customers in troubled countries. France's banks appear to be the most exposed.

As of Dec. 31, its four largest banks--BNP Paribas SA (BNP.FR, BNPQY), Credit Agricole SA (ACA.FR, CRARY), BPCE Group and Societe Generale SA (GLE.FR, SCGLY)--were holding a total of nearly 300 billion euros ($425 billion) throughout lending options as well as other debts distributed for you to organizations and people within England, Ireland, France, A holiday in greece and also Italy, this nations around the world which have been among Europe's most troubled. That is largely a result of some of the French banks having big retail- and commercial-banking operations in Greece, Italy and Spain.

The French banks' portfolios of commercial and retail loans in those countries dwarf their holdings of sovereign debt. For example, the four banks have a total of about EUR51 billion of loans to Spanish customers, according to the Journal's analysis. That even comes close about EUR15 thousand involving Speaking spanish sovereign debt, according to a separate analysis of stress-test data for the Journal by research firm SNL Financial. In Greece, whose economy isamid inside some sort of tailspin, french financial institutions include EUR33 billion dollars of several sorts of lending options, over 3 times his or her sovereign-debt holdings.

It is a similar story in Germany. The dozen German banks that disclosed their stress-test results were exposed to EUR174 billion of commercial and retail loans to Greek, Irish, Italian and Spanish borrowers as of Dec. 31. They are holding an additional EUR70 billion of sovereign debt issued by those countries, according to SNL.

More than half of the German banks' loan exposures are concentrated in the country's two biggest lenders, Deutsche Bank AG (DB, DBK.XE) and Commerzbank AG (CBK.XE, CRZBY). Deutsche Bank alone is holding nearly EUR80 billion of loans in those countries, including EUR7.5 billion of residential mortgages in Spain. Deutsche, which passed the stress tests with a 6.5% capital ratio under the EBA's worst-case scenario, said Friday which it 'feels properly prepared' to strike their cash goals.

While the tests did consider the impact of an economic downturn on banks' portfolios of loans and non-sovereign arrears for Portugal, Ireland in europe, Toscana, Greece furthermore This state with the world, a great number of authorities complained how the exams ended up exceedingly cancerous. For example, the EBA's worst-case scenario for Portugal envisioned an 11.6% unemployment rate this year, rising to 12.9% in 2011. The unemployment rate there is currently 12.4%.

The stress-test figures actually understate some banks' holdings of loans in certain troubled countries. That is because the European Banking Authority required banks to disclose their loan holdings in countries only if they represent at least 5% of the bank's comprehensive loan exposures.

As a result, some banks opted not to disclose details of their loan portfolios. To provide an example, LOne example isloyds Banking Group PLC (LYG, LLOY.LN) is in the process of shutting down its Irish banking business, which has cost the big British bank billions of pounds in loan losses. But in its stress-test materials on Friday, Lloyds didn't provide a breakdown of loans to countries other than the U.K. and the U.S.

Some sort of Lloyds spokeswoman explained this bank's Irish lending products will be included in a catch-all group noted 'other