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Moody’s Investors Service said that the completion of the joint Comprehensive Assessment (CA) by the European Central Bank (ECB) and European Banking Authority (EBA) of the balance sheets and resilience to shocks of European banks marks an important step toward the establishment of a credible Single Supervisory Mechanism in the region.
“Overall, Moody’s views the results of the CA as credit positive for euro area bank creditors, with the most notable outcomes of the exercise being the progress toward balance-sheet repair and the improved transparency of bank accounts,” said Carola Schuler at Moody’s.
Moody’s conclusions were contained in a just-released report titled “Results of ECB’s Comprehensive Assessment Reveal Broad Resilience of Banks’ Balance Sheets to Adverse Conditions”. The report is part of Moody’s ongoing coverage on the progress towards a Banking Union in the EU and associated credit implications for banks in the region.
“At the same time, Moody’s believes that the ECB’s declared aim of restoring confidence in Europe’s banking systems will take time and could be challenged by the still difficult character of the operating environment which faces the region’s banks,” said Schuler.
“Furthermore, many banks have only passed the stress test by very thin margins and/or could be challenged in meeting requirements based on fully-phased-in capital ratios. Accordingly, many banks will be expected to do more,” added Schuler.
Moody’s said that of the 130 euro area banks assessed, 105 were given a verdict of good health and due resilience, while of the 25 deemed as being unable to meet the minimum Common Equity Tier 1 (CET1) requirements in the asset quality review, as well as ‘base’ and/or ‘adverse’ scenario tests, 12 have already met their shortfalls; one is exempt from addressing a shortfall; and the remaining 12 require additional capital of EUR 9.5 billion.
The Moody’s median Baseline Credit Assessment (BCA) for the rated firms in this group (12 of 25) is caa2, highlighting that this selection matches the rating agency’s assessment of the more vulnerable banks in Europe.
Moody’s expects that most of these banks will be able to close their capital shortfalls by drawing on their own resources. However, in this context, the risks for investors in subordinated instruments remain high to the extent that any of these banks struggle to meet their targets.
The European Commission has set rules for burden sharing specifically in regard to capital shortfalls resulting from the stress test. These rules require bail-in (or conversion into equity) of subordinated instruments before public funds are used to address a shortfall.