EU updates bank stress test beyond failure
European regulators provided details for the latest stress test aimed at measuring the ability of the region's lenders to survive a financial crisis or severe economic downturn.
Unlike tests in past years, the latest test will not have a minimum capital threshold that lenders will have to meet in order to pass. As a result, no bank can actually fail - or pass - the examination, according to the European Banking Authority, which regulates lenders in the European Union. Instead, local banking supervisors like the Bank of England and the European Central Bank will use the results to determine whether banks need to take additional action, such as raising capital.
The test will examine the balance sheets of 51 European banks, representing 70 percent of the region's banking industry, the authority said. The results are expected to be announced in the third quarter. "The stress test is designed to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of E.U. banks to economic shocks," the authority said in a statement.
Several of the region's biggest lenders, including Credit Suisse and Deutsche Bank, have reported large annual losses for 2015 and are revamping their operations, including selling underperforming lines of business. European bank stocks have also declined sharply this month as investor concern grows over rapidly declining oil prices, an economic slowdown and bad loans. The regulator estimated in November that the region's banks had 1 trillion euros, or about $1.1 trillion, in so-called nonperforming loans on their books.
It is unclear how comprehensive this year's test will be in terms of assessing the overall health of the banking sector. The regulator's sample of banks will include only lenders with more than €30 billion in assets. As a result, some of Europe's more troubled lenders will not be examined.
No banks in Portugal will be part of the examination, which will also look at only one bank in Greece and spare several Italian lenders.
As part of the latest test, the regulator has said it would examine so-called conduct risk, or the potential impact of misconduct by a bank employee on the institution's solvency.
In 2014, the regulator examined the balance sheets of 123 of the region's lenders, identifying 14 banks that fell short of the capital requirements and would need additional buffers to be prepared for an economic downturn. The latest tests will include several banks in Britain, Sweden and other European Union countries that are not part of the eurozone and are not regulated by the European Central Bank.
The European Central Bank has said it will conduct its own stress test of institutions that it regulates but that are not subject to the European Banking Authority's examination.