EU plans tougher stress tests for banks
By Gabriele Steinhauser |
March 19, 2011, Saturday
|
Print Edition
Print Edition
THE European Union bank regulator said in Brussels yesterday that this year's stress tests on banks will be harsher than last year's, which were widely considered a failure, though important elements of the exercise deemed crucial to the region's crisis strategy remained undecided.
The test will see how banks fare with an extreme deterioration in financial markets and economic activity in order to gauge where the weak links in Europe's financial system are.
Last year's tests were discredited after some banks passed, only to require bailouts weeks later.
The new simulation will assume EU economic output will shrink 0.4 percent in 2011 and will show no growth in 2012 - a 4-percentage-point difference from current forecasts, the European Banking Authority said. That compares with a 3-percentage-point drop assumed in the 2010 stress tests.
However, even though the tests' results are due to be published in June, some important elements are still up in the air.
Crucially, the bar that banks would have to jump to pass the tests - namely the minimum capital ratio they have to maintain despite the shocks - was still missing from the scenarios published yesterday. The so-called core Tier-1 capital ratio currently varies from country to country, and the EBA said it was still in the process of defining the one to be used for the tests.
It also wasn't clear how many banks would be tested this year. The EBA only said that the tests would cover a "broadly similar group of banks" as last year, when 91 banks were included, and that the banks would represent more than 65 percent of EU banking assets.
The test will see how banks fare with an extreme deterioration in financial markets and economic activity in order to gauge where the weak links in Europe's financial system are.
Last year's tests were discredited after some banks passed, only to require bailouts weeks later.
The new simulation will assume EU economic output will shrink 0.4 percent in 2011 and will show no growth in 2012 - a 4-percentage-point difference from current forecasts, the European Banking Authority said. That compares with a 3-percentage-point drop assumed in the 2010 stress tests.
However, even though the tests' results are due to be published in June, some important elements are still up in the air.
Crucially, the bar that banks would have to jump to pass the tests - namely the minimum capital ratio they have to maintain despite the shocks - was still missing from the scenarios published yesterday. The so-called core Tier-1 capital ratio currently varies from country to country, and the EBA said it was still in the process of defining the one to be used for the tests.
It also wasn't clear how many banks would be tested this year. The EBA only said that the tests would cover a "broadly similar group of banks" as last year, when 91 banks were included, and that the banks would represent more than 65 percent of EU banking assets.
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