Europe’s banks are still waiting for a complete stress test. Details released on Oct. 3 show how the European Banking Authority’s benchmarking exercise last December did a more robust job than previous bank tests, which had not properly stressed for a euro zone sovereign default. But there’s still huge room for improvement.
The EBA’s latest test used sovereign haircuts based on the gapped-out bond spreads seen almost exactly a year ago, then required banks to achieve a 9 per cent core Tier 1 ratio. By the end of June, the 71 banks tested had raised over €200-billion of new capital. Yet investors are unlikely to relax.
For one thing, the EBA didn’t test for the losses a recession would bring. For another, the exercise was based on a so-called Basel 2.5 basis, an easier hurdle to jump than new Basel III rules. If Basel III was adopted right now and banks had to hold at least a 7 per cent core Tier 1 ratio, they would need to find an additional €224-billion compared to the banks’ position in December, according to the EBA’s recent analysis of 156 European banks.
Read more: EU bank stress tests need to drop the kid gloves - The Globe and Mail
No comments:
Post a Comment