19th Jan 2020

EU banking watchdog postpones new 'stress tests' until 2016

  • Europe's largest banks will avoid another 'stress test' until 2016, the EU's banking watchdog has said. (Photo: Travel Aficionado)

Europe’s largest banks will get another year to boost their balance sheets after the EU’s bank watchdog announced that it would not conduct its next ‘stress test’ of their books until 2016.

Instead of a stress test, in 2015, the London-based European Banking Authority (EBA) will run a “transparency exercise which will provide detailed data on EU banks' balance sheets and portfolios,” the watchdog said on its website.

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In a statement on Tuesday (3 March), EBA said that the decision was “driven by an acknowledgement of the progress that EU-banks have made in strengthening their capital positions.”

In a letter to European Parliament president Martin Schulz, the chairman of the EBA, Andrea Enria, said that the tests were so intensive that they needed to be planned well ahead of time to “give some time to prepare for the next exercise, both for the authorities as well as for the banks involved”.

Last year the EBA ran a ‘stress test’ of European banks alongside an asset quality review by the European Central Bank of the eurozone’s main lenders. In total, 130 of the bloc's biggest lenders, together accounting for more than 80 percent of the EU's total banking assets, were assessed by the two institutions.

A total of 24 banks were found to have capital shortfalls totalling €24.6 billion, ten of which were able to raise the extra cash by the end of 2014.

The stress tests attempted to simulate whether banks would be able to withstand future financial crises, in order to avoid a repeat of the multi-billion euro taxpayer-funded bailouts for the sector following the 2008-9 crisis.

The EU’s 30 largest banks have strengthened their capital positions by a combined €200 billion in the years since the financial crisis, and now hold assets worth 11.5 percent of their total balance sheets.

Meanwhile, EU lawmakers have passed new laws increasing the amount of high-quality capital on their balance sheets, and setting out a hierarchy of creditors who would absorb the losses if a lender faced difficulties staying solvent.

However, the simulations found that a "severe stress scenario" involving a recession wiping off 5 percent of the EU's output, would still reduce bank capital by €263 billion.

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