EU Bank Stress Test Results Receive Mixed Response from Industry

The European Banking Authority (EBA) has published the results of its 2011 EU-wide stress test of 90 banks in 21 countries. The aim of the 2011 EU-wide stress test is to assess the resilience of the banks involved in the exercise against an adverse but plausible scenario.

For the 2011 exercise, the EBA allowed specific capital increases in the first four months of 2011 to be considered in the results. Banks were therefore incentivised to strengthen their capital positions ahead of the stress test.

The 2011 EU-wide stress test results show that:

  • At the end of 2010, 20 banks would fall below the 5% core Tier 1 ratio (CT1R) threshold over the two-year horizon of the exercise. The overall shortfall would total €26.8bn.
  • Between January and April 2011, a further net amount of some €50bn of capital was raised.

Taking into account these capital raising actions implemented by end April 2011:

  • Eight banks fall below the capital threshold of 5% CT1R over the two-year time horizon, with an overall CT1 shortfall of €2.5bn.
  • Sixteen banks display a CT1R of between 5% and 6%.

On the basis of these results, the EBA has also issued its first formal recommendation stating that national supervisory authorities should require banks whose CT1R falls below the 5% threshold to promptly remedy their capital shortfall. The EBA notes that this is not sufficient to address all potential vulnerabilities at this point. Therefore, the EBA has also recommended that national supervisory authorities request all banks whose CT1R is above but close to 5%, and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position. These would include, where necessary, restrictions on dividends, deleveraging, issuance of fresh capital or conversion of lower-quality instruments into core Tier 1 capital.

Michael Kemmer, general manager of the Association of German Banks (AGB), said: “Regulatory stress tests such as the current EBA test can deliver valuable insight at overall market level. The results allow, in particular, an assessment of the resilience of the European banking system as a whole. In this respect, they provide important information, create transparency and thus help to build confidence. We therefore appreciate the work performed by the EBA in conducting this year’s stress test.

“At the same time, it is highly regrettable that the EBA has not taken up our criticism of the present form of publication of the stress test results and unfortunately discloses wide-ranging details of individual banks’ business strategy. In the current uneasy situation on the financial markets, it cannot be ruled out that this detailed information may seriously exacerbate market volatility or could even be used for speculation against some banks,” he added.

Richard Barfield, director at PricewaterhouseCoopers (PwC), said: “The results are unlikely to be a deal breaker for UK banks. Despite the onerous and more severe nature of these tests, the UK banking industry has continued to strengthen its capital position and ratios since the last round and should emerge in relatively good health compared to some of its European counterparts – not least because of the severity of the FSA’s [Financial Services Authority] own stress tests. The real interest for UK banks and the sector’s investors will be individual banks’ sovereign exposures particularly to Greece, Ireland, Portugal, Spain and Italy.

“The larger banks (which contain most of the systemically important financial institutions [SIFIs]) are also likely to fare better than the smaller ones – perhaps raising questions for some about the SIFI surcharge. Stress testing is about risk management – not creating risk in the system. The results are being released at a time of severe stress across the eurozone and it is vital that the results of the EBA’s test do not lead to unintended consequences.

“It is clear stress tests will be a regular feature of the future regulatory environment. Although much work has been done, many banks are still not adequately prepared for this extra level of supervision and need to upgrade their internal processes. The tests also flag the importance of putting recovery and resolution plans in place,” Barfield concluded.


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