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The results of the EU-wide stress test
Practical Law Legal Update 0-507-2082 (Approx. 3 pages)
The results of the EU-wide stress test
by Norton Rose
| Published on 11 Aug 2011 • United Kingdom |
This article is part of the PLC Global Finance July 2011 e-mail update for the United Kingdom.
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On 15 July 2011, the European Banking Authority (EBA) published the results of its 2011 EU-wide stress test. The objective of the stress test was to assess the resilience of the EU banks involved against an adverse but plausible scenario. Its purpose was to provide an unprecedented level of transparency as to the sensitivities of the European banking sector to a general economic downturn and the impact of external variables, such as interest rates, economic growth and unemployment.
The results of the EU-wide stress test
Simon Lovegrove
On 15 July 2011, the European Banking Authority (EBA) published the results of its 2011 EU-wide stress test. The objective of the stress test was to assess the resilience of the EU banks involved against an adverse but plausible scenario. Its purpose was to provide an unprecedented level of transparency as to the sensitivities of the European banking sector to a general economic downturn and the impact of external variables, such as interest rates, economic growth and unemployment.
Some in the market criticised the stress test arguing that it contained a glaring omission by not looking at what would happen to the banks if there was a Greek sovereign debt default. Others dismissed this criticism on the basis that further analysis of Greek default scenarios would not serve any useful purpose. Notwithstanding these arguments the stress test appeared to be a fairly ambitious exercise involving 90 banks in 21 countries, 3,200 data points per bank with 10 pages of disclosures per bank.
Turning to the results of the stress test the key findings were that:
- 20 banks would fall below the 5% Core Tier 1 Ratio (CT1R) threshold over the two-year scope of the exercise. This translated into an overall shortfall of EUR 26.8 billion.
- From January to April 2011, a further net amount of EUR 50 billion of capital was raised. The EBA permitted specific capital increases in the first four months of 2011 which meant that banks were incentivised to strengthen their position in advance of the stress test.
- Taking into account the capital raising action implemented by end April 2011: (a) Eight banks fell below the capital threshold of 5% CT1R over the two-year time horizon, with an overall CT1 shortfall of EUR 2.5 billion; and (b) 16 banks displayed CT1R of between 5% and 6%.
The results are a mixed bag but from a UK perspective the stress test did not really reveal anything new with the major UK banks appearing to be well ahead of the curve. Many have mentioned that the UK banks bigger concern is what they will have to put in the retail ring fence proposed by the Vickers’ interim report and the implications of having to hold the recommended Tier 1 capital cushion of 10 per cent which is well above the stress test scenarios.