Friday

21st Jan 2022

EU stress tests to kill off weak banks, experts say

  • Analysts say the stress test will lead to consolidation in the banking sector (Photo: Wikipedia)

As the debate over the credibility of Europe's banking sector stress tests continues to rage, analysts say the EU's refusal to openly discuss a framework for national debt restructuring has placed the bloc's politicians in an intractable bind. In addition, observers say the tests are likely to see consolidation in the sector.

With results from the tests set to be published on Friday week (23 July), concern is centered on whether market participants will consider the criteria used to assess the firms' weaknesses as sufficiently thorough or merely a political whitewashing stunt.

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Weighting the reduced value of the huge stockpile of sovereign eurozone bonds held by the 91 banks under examination is proving especially contentious, with reports suggesting the value of Greek bonds will be marked down by 17 percent and Spanish bonds by 10-11 percent.

Blasted as being too low by some commentators who favour a markdown closer to 50 percent, the committee of national supervisors carrying out the tests is restricted by memberk states' current dialogue on national debt restructuring, said Nicolas Veron.

Germany supports the creation a European framework to manage future debt restructurings in an orderly way, but other member states have come out against the idea.

"A higher haircut would be an admission that a sovereign debt restructuring may be needed," said Mr Veron, a researcher at the Brussels-based Bruegel think-tank. "They are bound by this."

He suggests that no haircut be applied to the sovereign bonds as part of the tests, but instead that banks should provide a maximum amount of information to investors on what bonds they hold, allowing them to make the decision.

Consolidation in the sector

Most agree however that any question mark over the veracity of next week's tests could spell another bout of instability for the EU.

"If the market is not convinced then we are in for trouble," said Rym Ayadi, a researcher with the Centre for European Policy Studies, another Brussels-based think-tank.

Ms Ayadi believes that the publication of the results will lead to a significant reduction in the number of European banks on the ground, as weaker firms become the target of takeover deals.

"There are 91 banks being tested at the moment, I don't think there will be 91 at the end," she said.

Despite the potential takeovers and efforts of banking executives to raise extra capital from the private sector, large capital injections from governments are likely to be needed to shore up a number of the firms diagnosed as being vulnerable.

"I expect most of the recapitalisations of Spanish regional lenders and the German state-owned Landesbanken will be done from state funds," said Deutsche Bank's chief economist Thomas Mayer.

This in turn will place an additional strain on already over-stretched national coffers, he added.

Aware of this, EU officials have already indicated that governments will have recourse to components of the eurozone's €750 bail-out mechanism, if needed however.

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