EU up­dates bank stress test be­yond fail­ure

The Pak Banker - - COMPANIES/BOSS -

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.

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