EU aims to shock with tougher bank stress tests
The strength of Europe's banking system is about to be tested against a fictional doomsday scenario that includes a global bond rout and a currency crisis in central and eastern Europe.
The strength of Europe's banking system is about to be tested against a fictional doomsday scenario that includes a global bond rout and a currency crisis in central and eastern Europe.
The three-year outlook features "the most pertinent threats" to the stability of European Union banks and their potential impact on entire balance sheets, according to a draft European Banking Authority statement.
The authority is due to release the details today in co-ordination with the European Central Bank.
As the ECB prepares to take over supervision of about 130 euro-area lenders from BNP Paribas to National Bank of Greece in November, policymakers have chosen to reflect real-world developments like the tensions over Ukraine in a bid for more credibility in the toughest stress tests to date.
Similar exercises in 2010 and 2011 were criticised for failing to uncover weaknesses at banks that later failed.
"The negative impact of the shocks, which include also stress in the commercial real estate sector, as well as a foreign exchange shock in central and eastern Europe, is substantially global," the draft statement said. "For most advanced economies, including Japan and the US, the scenario results in a negative response of GDP ranging between 5 and 6 per cent in cumulative terms compared to the baseline."
The total impact of the shocks on gross domestic product will reportedly be equivalent to 7 percentage points of growth below European Commission forecasts over the three years to 2016.
"Those details imply the EBA will stress banks with a 360-degree approach, including any kind of possible risk on their balance sheets," said Fabrizio Bernardi, a Milan-based banking analyst at Fidentiis Equities. "It's more complex and tougher than the 2011 test, which considered only a shock on sovereign debt."
The stress tests are the third part of the ECB's year-long assessment of euro-area banks. Officials have claimed its credibility will be enhanced by a preceding asset-quality review that aims to uncover the true state of lenders' balance sheets.
A spokesman for the EBA could not be reached for comment. An ECB spokeswoman did not comment.
The exercise, which will examine a sample of 124 banks that cover more than half of each EU member state's banking industry, is scheduled to begin towards the end of next month. The results will be published in October.
As a pass mark for the base scenario, which uses EU growth and unemployment forecasts to 2016, banks have to be able to maintain a capital-to-risk-weighted-assets ratio of 8 per cent. In the so-called adverse scenario, where lenders are allowed to run down loss capital buffers, the ratio is 5.5 per cent.
