Twenty-five banks including Italy's Banca Monte dei Paschi di Siena SpA failed a stress test led by the European Central Bank, which said almost half of them must act to raise more capital. The central bank in Frankfurt identified a 25 billion-euro shortfall ($32 billion) for the region's lenders, and said 12 of them have now raised enough funds. Eleven banks need more capital, including Monte Paschi with a gap of 2.1 billion euros. 

"Although this should restore some confidence and stability to the market, we are still far from a solution to the banking crisis and the challenges facing the banking sector," Colin Brereton, economic crisis response lead partner at PwC, said in an e-mailed statement. "The Comprehensive Assessment has bought time for some for Europe's banks." That two-part exam, comprising an Asset-Quality Review of balance sheets as of Dec. 31, 2013, and a stress test, forms one pillar of the ECB's drive to move the euro zone forward after half a decade of financial turmoil by making its impact on the banking system transparent. 

Banks will have from six to nine months to fill the gaps and have been urged to tap financial markets first. The ECB's stress test was conducted in tandem with the London-based European Banking Authority. The EBA's sample largely overlaps the ECB's, though it also contains banks from outside the euro area. 

ITALIAN BANKS 

The ECB assessment showed Italian banks in particular are in need of more funds as they cope with bad loans and the country's third recession since 2008. Monte Paschi, Italy's third-biggest bank, Banca Carige SpA and two other smaller cooperative lenders have a combined 3.3 billion-euro gap that must be replenished because the measures taken this year weren't sufficient, the Bank of Italy said in a statement today. "The minister is confident that the the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the Comprehensive Assessment will allow to easily complete such transactions," Italy's finance ministry said in a statement. Of the 13 banks that the ECB identified as having not raised enough capital, two Greek ones are exempted because their repair plans are already in progress. 

BUSINESS MODELS 

"The Comprehensive Assessment allowed us to compare banks across borders and business models," ECB Supervisory Board Chair Daniele Nouy said in a statement. "The findings will enable us to draw insights and conclusions for supervision going forward." The ECB said lenders will need to adjust their asset valuations by 48 billion euros, taking into account the reclassification of an extra 136 billion euros of loans as non performing. 

The stock of bad loans in the euro-area banking system now stands at 879 billion euros, the report said. Italian banks will have to implement the largest asset-value adjustments according to the findings of the review, equivalent to 12 billion euros. Greek banks will have to revalue by 7.6 billion euros, and German banks by 6.7 billion euros, the report showed. Italian lenders were buffeted by the stress test, suffering a hit to capital of 35.5 billion euros, followed by French banks with 30.8 billion euros.