European banks were put through a series of stress tests today. And eight banks failed, while another 16 only passed narrowly.

Eight banks flunked the European Union’s “stress tests,” with a combined shortfall of €2.5 billion ($3.54 billion) in capital under a simulated worst-case economic scenario, the European Banking Authority said.

The EU regulator said Friday that another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system.

By awarding a relatively clean bill of health to the vast majority of Europe’s banking industry, the tests are likely to be greeted with skepticism.

Yes, it’s considered a relatively clean bill of health that eight banks failed the stress tests, and another 16 barely passed, out of a total of 91 checked. That’s over a quarter of the survey, and failing the stress test in this case equals a failed bank. Calculated Risk is extremely skeptical, since the banks hold €1.1 trillion in the debt of Greece, Ireland, Portugal and Spain, and yet they only need €2.5 billion in capital. What were these stress tests measuring, anyway?

Remember that one other bank, the German firm Helaba, pulled out of the stress tests before they were announced.

10 of the 91 were expected to fail the tests, so apparently they did better than expected. That says more about the tests than the banks, I would gather. According to FT Alphaville, 20 banks would have failed if capital raisings between January and April of this year didn’t count. This is a comment from the Guardian’s liveblog:

With only eight banks failing and the requirement for these banks to raise 2.5 billion in capital, it wasn’t the solution to restore confidence. What was needed was for more banks to fail and for more capital to ultimately be raised.

That being said, I don’t think people really expected that outcome. But the solution to the wider sovereign/bank malaise in Europe needs to go beyond simply pumping more capital into the continent’s banks. That’s the underlying message, the solution’s gone beyond that.

I think we can say that this stress test didn’t tell us much, and European banks are still fairly sick.

David Dayen

David Dayen