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Points of View: ECB Stress Tests

This weekend the European Central Bank (ECB) released the results of its much anticipated health check on the Continent’s banking system. The stress tests, and an accompanying review of the quality of banks’ assets, assessed the ability of 150 leading European banks to withstand a deteriorating economic and financial environment and were the culmination of more than a year of intensive work aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt.

The results revealed the majority of banks to be robust; of the 25 Eurozone banks that failed the ECB’s tests, which were carried out as at the end of 2013, only 13 still need to raise capital after action taken this year.   This signifies that Eurozone banks are broadly in better financial shape compared to when they were last tested in 2011. Of the banks that still have to bridge the gaps in their capital, Italy faces the biggest struggle, with nine of its banks on the blacklist. In particular, Banca Monte dei Paschi dei Sienna was identified as having the largest capital hole to fill and has since seen its shares tumble.  Four UK banks were subjected to concurrent stress tests conducted by the European Banking Authority (EBA) and, as expected, they all passed.

The European Commission welcomed the results of the assessments, saying that both the ECB and EBA undertakings involved robust exercises, unprecedented in scale and among the most stringent worldwide. However, bankers and analysts were quick to cast doubt on claims that the exercise would open the floodgates to a rush of new bank lending in Europe.

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