Bank of Valletta has emerged as one of the soundest financial institutions in the EU confirming the traditional resilience of the Maltese banking system.

Ninety banks from 21 EU member states were examined by the EU’s Banking Authority (EBA), testing their ability to face a severe economic crisis with a plausible four per cent drop in GDP, high unemployment levels and falling house prices by the end of 2012.

BOV, the only Maltese bank included in this year’s stress tests, featured among the top 15 most resilient banks.

On the other hand, eight banks failed to reach the benchmark, defined with reference to capital of the highest quality – Core Tier 1 (CT1), set at five per cent of risk weighted assets. Another 16 banks narrowly passed the tests and will need to inject fresh capital into their system if they are to survive.

The banks that failed the test are based in Spain (5), Greece (2) and Austria. Those close to failure were in Spain (7), Germany (2), Greece (2), Portugal (2), Cyprus, Italy and Slovenia.

According to the European Banking Authority, which published the much anticipated results in Brussels yesterday evening, the 2011 stress test results show that when taking into account capital raising actions implemented by the end of April 2011, eight banks fell below the capital threshold of five per cent CT1R over the two-year time horizon, with an overall CT1 shortfall of €2.5 billion and 16 banks display a CT1R of between five and six per cent.

Despite the exercise’s worst case scenario, BOV ended the test with a CT1R of 10.4 per cent, one of the best results achieved in the exercise.

The EBA said that on the basis of these results it issued its first formal recommendation stating that “national supervisory authorities should require banks whose CT1R falls below the five per cent threshold to promptly remedy their capital shortfall.”

“It is also being recommended that national supervisory authorities request all banks whose CT1R is above but close to five per cent and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position. These would include, where necessary, restrictions on dividends, deleveraging, issuance of fresh capital or conversion of lower-quality instruments into Core Tier 1 capital.”

The EBA said it would monitor the implementation of these recommendations and produce progress reports in February and July 2012.