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“Stress Test”: EU Banks “Resilient”

  • July 24th, 2010
  • Posted by EUEditor

eurosymbol-frankfurt1.jpg“The results confirm the overall resilience of the EU banking system to negative macroeconomic and financial shocks, and are an important step forward in restoring market confidence” – the dry statement of approval (23.7.10) from European banking authorities, after running their open financial tests on 91 banks.

WOULD THEY WITHSTAND A NEW CRISIS?

The “stress testing” procedure was set up as a transparent exercise, to show the world whether two-thirds of banks in the “Eurozone” (the 16 countries using the Euro currency) would stand up to a sudden economic down-turn.

Factors taken into account in the searching “hypotheticals” ranged from a surge in joblessness, to falling home prices, widespread reneging on debt including consumer credit card accounts, and falling economic growth.

Would the banks’ balance sheets stand up; would they go broke?

SEVEN BANKS TOLD TO MAKE CHANGES

The results showed that all but seven would stand up; those seven (five in Spain, one in Greece, one in Germany) have been told they will need to raise €3.5-billion (A$5.05-billion; dcerates.com, 24.7.10) to build up their finances.

The testing was undertaken by the Committee of European Banking Supervisors (CEBS), with national banking authorities, in response to loss of investor confidence, flowing on from the 2008 global financial crisis.

It established that banks would be likely to remain solvent and continue lending, under circumstances considered more severe than could realistically be predicted.

STATEMENT FROM REGULATORS

A statement from the CEBS, the European Central Bank (ECB) and  European Commission:

“The adverse scenarios used in the stress test are designed as ‘what-if’ scenarios reflecting severe assumptions which are therefore not very likely to materialise in practice.

“We support, in particular, the transparency of this exercise, given the specific market circumstances under which banks currently operate. We therefore welcome the publication of banks’ individual results …Such disclosures ensure transparency regarding conditions in the EU banking sector.

“Where the results of the exercise indicate that individual banks require additional capital, these banks should take the necessary steps to reinforce their capital positions through private-sector means and by resorting, if necessary, to facilities set up by Member State governments, in full compliance with EU state-aid rules.”

A spokesman for the ECB noted the stress testing scenario did not include the possibility of a European government defaulting on its debt obligations, saying such a development was extremely unlikely.

Reference

EC, ECB, CEBS; Frankfurt, Joint press release … Publication of the results of the EU-wide stress-testing exercise, 23.7.10. www.c-ebs.org;
http://www.ecb.int/press/pr/date/2010/html/pr100723_1.en.html
, (24.7.10).

Pan Pylas (with Juergen Baetz, Greg Keller, Elena Becatoros, Derek Gatopoulos, Barry Hatton, Colleen Barry, Ciaran Giles), Associated Press, NY;  “Vast majority of EU banks pass ‘stress tests’”, 23.7.10. http://news.yahoo.com/s/ap/20100723/ap_on_bi_ge/eu_europe_stress_tests, (24.7.10).

Picture   Euro sculpture, Frankfurt Am Main

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