NORTH AMERICA - More than 12% of US banks have failed independent stress tests primarily as a result of exposure to risky commercial real estate loans.
According to Trepp, which tested 6,000 banks against criteria used by the Federal Reserve for stress tests carried out in March on the 19 largest US banks, one in eight banks lacks adequate capital to withstand adverse macro scenarios.
Variables factored into the tests included GDP growth, unemployment, interest rates and house prices.
Banks failing the test would require $27bn (€20.8bn) in additional capital to achieve a pass grade, according to the New York-based CMBS research firm.
Forecast commercial real estate losses for the 784 failing banks totalled $9.8bn in the two years to Q3 2014.
Real estate losses accounted for 39% of $25bn in total losses among failed banks in the tests, but only 14.7% of losses among all banks.
Similarly, commercial and industrial loans accounted for 23.8% of forecast losses for failing banks but 13.9% among the total sample.
Losses on commercial real estate loans were 50% more severe for failing banks, while those for commercial and industrial loans were 47% more severe.
Size emerged in Trepp's tests as an indicator of likely under-capitalisation and real estate debt exposure.
Most exposed by the tests were small and medium-sized banks.
According to the tests, banks with less than $10bn in assets were most likely to fail (12.1%).
Those with less than $1bn registered the highest failure rate (12.9%).
Even the removal of some assumptions - such as banks continuing their existing dividend policies - only reduced the overall failure rate to 10%.
Despite the higher-than-expected failure rate, Trepp analysts described the US banking system as "now on a much firmer footing than it was four years ago".
They described the 12.7% fail rate as being far lower than what would have been logged four years ago.
"Regardless," it added, "if the percentage of banks that fail the T-CAST [stress tests] remains in the double digits four years from now, the answer is that the industry has not done enough to reform itself."