Eurozone Monetary Policy


Eurozone: 25 banks fail ECB stress test but overall result positive

October 27, 2014

The publication on 26 October of the results of the stress tests conducted by the European Central Bank (ECB) in collaboration with the European Banking Authority (EBA) provided reassuring news regarding the state of health of the European banking system. According to the results of the exercise—which began in November of last year and assessed more than 150 banks in the region—only 25 banks failed to meet the capital requirement needed to pass the stress test. Moreover, most of the non-complying banks had already taken sufficient steps to solve their problems and only 13 banks will need to raise a combined EUR 9.5 billion in extra capital.

The “comprehensive assessment” of the region’s banking sector was a preliminary step before the ECB takes on the role of single supervisor of the European banking system on 4 November—a milestone in the creation of a regional banking union. The exercise comprised a review of the assets owned by the banks to determine if those assets were priced correctly, and a stress test to check whether banks have enough capital to withstand a deterioration of member states’ economic outlooks. Similar exercises had been conducted in 2010 and 2011, but were criticized for the relatively soft criteria applied; many of the banks that passed the tests were subsequently found to have important problems in their balance sheets and had to be rescued by their governments.

At a country level, the worst performance was mostly concentrated within Italy’s banks. Nine Italian banks failed the test for capital requirements; of those nine, four had not taken the necessary steps to solve the problem and will be forced to raise a total of EUR 3.3 billion in additional capital. Banks that did not meet the capital requirements have two weeks to explain to the ECB and EBA how they will address the capital shortfall and then they will have nine months to do so.

Analysts largely believe that the result of the asset-quality review and stress test was positive. According to analysts at Danske Bank:

“Overall, the AQR and stress test should be positive for the European banking sector, by improving transparency and pointing to a modest need to raise additional capital. [..] The outcome should reduce tail risks for the sector overall. [..] The finalisation of the comprehensive assessment should also be supportive for credit growth in the euro area, first of all as banks no longer have to worry about the review of their balance sheets and secondly as the result reveals that the headwind to credit creation from capital shortage should be limited and only be present in a few countries.”

Author:, Head of Data Solutions

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