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Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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