German property lender Hypo Real Estate (HRE) has said that its failure to pass the pan-European stress test designed to determine banks' financial health has 'limited relevance' for the group as the finding does not reflect steps being taken to strengthen its balance sheet.

News of HRE's failing grade did not come as a big surprise as rumours it would not pass were circulating prior to the publication of the findings by the Committee of European Banking Supervisors (CEBS) on Friday.

Aside from HRE, five Spanish regional savings banks, known as the Cajas, and ATEBank in Greece also failed. The stress test examined 91 Continental European banks, including 27 Spanish institutions, 14 in Germany and six in Greece, with the combined total representing 65% of the European Union banking sector.

In a reaction on Friday, HRE said the group exceeds the 6% tier 1 ratio required by CEBS for all scenarios, except for two cases which test particularly negative conditions for 2011. HRE also maintains the regulatory minimum tier 1 ratio of 4% in all stress scenarios tested.

The CEBS, HRE said, did not take account of measures being taken as part of a root-and-branch re-organisation of the group. 'For instance, the test has not taken into consideration the transfer of assets worth up to EUR 210 bn to FMS Wertmanagement -the deconsolidated environment to which assets will be transferred from the HRE -which is scheduled for the second half of 2010. This transfer will substantially reduce risk-weighted assets.'

'Furthermore, given that the financial markets crisis has not been fully resolved, the HRE Group applied to Soffin (the German financial market stabilisation fund) for a recapitalisation in an aggregate amount of EUR 10 bn, of which EUR 7.9 bn has been approved to date. Given full recapitalisation, HRE would exceed the 6% tier 1 ratio for all scenarios used in the current stress test.'

One of the most prominent European casualties of the financial crisis, HRE is now entirely owned by the German government via Soffin.