ECB stress tests: More stress for banks or citizens?

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Source: forexinfo.com

Results of the European Central Bank’s (ECB) stress tests for European banks were published last Sunday. Twenty-four banks out ob 123 failed the tests, including two biggest Slovenian banks, Nova Ljubljanska banka (NLB) and Nova kreditna banka maribor (NKBM). Twelve out of these 24 banks have already raised enough capital to secure their businesses in case of severe stress and the tests are this time seen as quite positive.

But what do these stress tests really show and what do they mean for the population of a country that the banks are from? 

RESULTS WERE “NOT SO BAD”

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President of the ECB, Mario Draghi. Source: telegraph.co.uk

The stress tests involved  123 European banks holding more than 20 trillion euros in deposits and showed that approximately 7 billion Euros of capital would be needed if an adverse scenario the banks were measured against occurs in 2016. According to an analyst at Societe Generale, this is not “a huge deal”, reports Businessinsider.

Nevertheless, not everybody agrees with the French banker. The ECB showed that the banks involved in the tests were lack a total of 25 billion Euros, and the overall impact on them would run to 62 billion Euros. Most of this capital has, according to Bloomberg, already been raised by those same banks.  Nevertheless, Italy’s Monte Paschi (BMPS) and Banca Carige SpA (CRG) are still among Among lenders still in need of funds. They must find a combined 2.9 billion euros between them, which is not a negligible sum.

Italy’s Monte dei Paschi, Europe’s oldest bank, is also the one in worst shape, while other banks failing the tests are from Austria, Belgium, Cyprus, Greece, Ireland, Portugal, and Slovenia. None of the EU’s banking giants in the UK, France, or Germany failed the tests.

 

WHAT ARE THE STRESS TESTS?

The European Banking Authority (EBA) explains on its website that the aim of the stress test is to assess the resilience of EU banks to adverse economic developments, so as to understand remaining vulnerabilities, complete the repair of the EU banking sector and increase confidence.” The exercise is modeled in a way that shows how banks would be influenced, should their common equity ratio drop significantly and what kind of adjustment it would lead to.

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It seems that the European Central Bank has gained recognition and trust of the EU Member States in carrying out the stress tests. Source: ECB

In preparation for this years’ stress tests the EU banks have made significant progress and have between January and September raised 53.6 billion Euros of equity and 39.1 billion Euros of contingent convertible instruments.  One could say that this shows the level of importance which EU banks attribute to the EBA/ECB stress tests trying their best to prepare in order to achieve good results. It also shows the seriousness of the exercise and the transparency that it it carried out with.

The 2014 EU-wide stress test is coordinated by the EBA and is carried out in cooperation with the ECB, the European Systemic Risk Board (ESRB), the European Commission, and the competent authorities from all relevant Member States. Competent authorities in Member States, including the ECB for the euro area, are responsible for the quality assurance of banks’ data as well as for supervisory actions banks will have to take in response to the outcome of the exercise.

As there is no real Eurozone policy in the framework of the EU Treaties, which would allow for sanctioning those banks failing the stress tests, the consequences need to be looked at from a political perspective. The lenders do, however, now have two weeks to present a plan to improve their balance sheets to the regulators.

RELATIVE IMPORTANCE OF BANKS

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A national issue can become the least of European problems, once put into perspective. Source: businessinsider.com

Looking at the stress tests from a more political point of view, we have to take into account the relative size of banks in individual Member States. In case of Slovenia, the two banks failing the tests are also the biggest ones in the national market. NLB is the largest Slovenian bank holding approximately 30% of domestic banking assets and the NKBM is the second largest Slovenian bank with around 10% market share. According to the stress tests NLB fell short of 34,25 million Euros of CET1 capital, while NKBM would require 31,03 million Euros, reports the Slovenian journal Finance. However in any case, those two banks will not need state supported bailouts as the amounts requred will be covered with some restructuring measures and expected profits.

Wile these two banks represent an important part in the Slovenian banking sector and have raised quite some dust in the national media they need to, however, be perceived by the local population also as a part of a bigger picture. The combined sshortfallof the two banks represents a minimal amount in the EU perspective. For the European banking sector as a whole, the two Slovenian “bad boys” are most probably the last of trouble.

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Avtor: Špela Majcen Marušič

I am a Slovenian EU affairs analyst, proud member of the Charles Darwin promotion at the College of Europe with experience in the European Parliament and the UN Refugee Agency. I believe that a kinder world can be created through cooperation and understanding. We are not as different as we tend to believe. You can follow me on Twitter @SpelaMa.

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