Banks pass the health check test

Newsroom 19/07/2011 | 15:47

The European Banking Authority has released a report on the stress tests it has conducted on several banks across Europe, to see how they can handle difficult economic scenarios. Bankers are wary of the contagious effect of Eurozone’s debt crisis whose latest victim is Italy, whose debt stands at EUR 4 trillion, and are anxiously expecting the second bailout program for the Greek economy while the fate of the common euro currency is on the line, the study shows.

Essentially, what a stress test does is asses the impact of movements in relevant variables on the assets and liabilities of a bank which in turn impact the capital position.
The scenario assesses banks against deterioration in variables such as GDP, unemployment and house prices. For instance, if GDP would fall 4 percent from the baseline. Exposures in the assets portfolio and changes in interest rates and sovereign spreads also impact banks and are part of the stress test exercise. However, this is not the sole instrument for solvency assessment.

A total of eight banks fell below the capital threshold of 5 percent, with an overall shortfall of EUR 2.5 bn. The 5 percent ‘core tier 1’ capital threshold describes the best form of capital a bank can hold withstand any losses.

EFG Eurobank (Greece) which controls Bancpost, ATEBank (Greece) and Volksbank (Austria) are the under-capitalized institutions which are also present in Romania. Another five Spanish banks failed to meet the 5 percent benchmark, while a further 16 banks were positioned in the range of 5-6 percent and should be under supervision by local authorities.

The Spanish central bank issued a press-release shortly after the report of EBA had been published, stating that no additional capital injections were required by any Spanish bank or caja as a result of the stress test. Spanish officials consider that stress tests are not the only instrument for solvency assessment and that numerous factors have to be taken into account when supervising an activity. These factors include profitability, internal controls and risk management or the business model and plan.

The 2011 EU-wide stress test involved 90 banks in 21 countries and runs from 2010 to 2012. It aims to offer supervisory and transparency tools for analysts and policy makers.

 

Ovidiu Posirca

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