European Union banks face their toughest probe yet in a bid to weed out the sector’s weaklings, the bloc's chief watchdog said on Friday, announcing stress tests intended to help draw a line under the financial crisis.
More than half a decade since the start of the 2008-2009 credit crunch, and despite more than 1 trillion euros ($1.4 trillion) of state support, confidence in the sector remains fragile and the EU's latest health checks are intended to settle any lingering doubts over its finances.
The European Banking Authority (EBA), the EU watchdog coordinating the tests, said on Friday that to pass, banks must have a core capital ratio of above 5.5 percent during the three-year stressed scenario, including above 8 percent at the starting point.
This reflects the amount of capital reserves banks have to put aside to cover unpaid loans or market bets that go wrong and represents a higher bar than in previous tests or before the crisis, when it was typically about 2 percent.
For the banking sector as a whole a key issue is whether the tests will force another round of multi-billion euro capital-raisings via share issues, but the answer to that question won't emerge until later in the process.
Some banks like Deutsche Bankand Monte dei Paschi have moved early to bolster their balance sheets but there may be more to come. The Bank of Italy for instance has said some smaller Italian lenders may need 1.2 billion euros in total.
Analysts have estimated the tests could show a total shortfall of up to 100 billion euros.
The 2014 tests will apply to 124 banks across the EU, such as leading lenders BNP Paribas, accounting for roughly 30 trillion euros in assets. The stresses being tested will be revealed in April or May.
"The more rigorous the better," said Francisco Gonzalez, chairman of Spanish bank BBVA. Angel Ron, chairman of rival Banco Popular , said the 5.5 percent threshold is demanding but his bank was is "very well prepared".
The EBA is mapping out a timeline and common methodology that must be applied to all banks, but some national supervisors will add additional risks to be tested. Germany, for example, is likely to also test for exposure to the shipping business, to which some of its banks lent heavily.
The Bank of England said its own stress test of eight banks, including Barclays, HSBC and RBS , will run alongside the common EU test, dashing any hopes among lenders it would be a substitute. [ID:nL9N0L103L]
The outcomes of prior balance sheet or asset quality reviews
(AQR), due to be completed in June, and the stress test itself, which starts in May, will be combined into a single result for each lender in October, spelling out the size of any capital shortfall.
The German banking lobby said extra national tests would muddy the picture, but the EBA said they would be reported separately from the common EU test to make comparisons valid.
Source: Reuters
More than half a decade since the start of the 2008-2009 credit crunch, and despite more than 1 trillion euros ($1.4 trillion) of state support, confidence in the sector remains fragile and the EU's latest health checks are intended to settle any lingering doubts over its finances.
The European Banking Authority (EBA), the EU watchdog coordinating the tests, said on Friday that to pass, banks must have a core capital ratio of above 5.5 percent during the three-year stressed scenario, including above 8 percent at the starting point.
This reflects the amount of capital reserves banks have to put aside to cover unpaid loans or market bets that go wrong and represents a higher bar than in previous tests or before the crisis, when it was typically about 2 percent.
For the banking sector as a whole a key issue is whether the tests will force another round of multi-billion euro capital-raisings via share issues, but the answer to that question won't emerge until later in the process.
Some banks like Deutsche Bank
Analysts have estimated the tests could show a total shortfall of up to 100 billion euros.
The 2014 tests will apply to 124 banks across the EU, such as leading lenders BNP Paribas
"The more rigorous the better," said Francisco Gonzalez, chairman of Spanish bank BBVA
The EBA is mapping out a timeline and common methodology that must be applied to all banks, but some national supervisors will add additional risks to be tested. Germany, for example, is likely to also test for exposure to the shipping business, to which some of its banks lent heavily.
The Bank of England said its own stress test of eight banks, including Barclays
The outcomes of prior balance sheet or asset quality reviews
(AQR), due to be completed in June, and the stress test itself, which starts in May, will be combined into a single result for each lender in October, spelling out the size of any capital shortfall.
The German banking lobby said extra national tests would muddy the picture, but the EBA said they would be reported separately from the common EU test to make comparisons valid.
