Business World

Friday 14 December 2018

Eurozone on edge over fears stress test could reveal €770bn shortfall

Jean-Claude Trichet
Jean-Claude Trichet

Laura Noonan

AN objective stress test of the eurozone's biggest banks could reveal a capital shortfall of more than €770bn and trigger further public bailouts, a study by an adviser to the EU's financial risk watchdog and a Berlin academic has found.

The study and others published ahead of the EU stress tests, whose results are due in November, are important because they set the expectations against which markets will judge the credibility of the European Central Bank's attempt to prove its banks can withstand another crisis without taxpayer help.

If official figures are far below independent estimates, authorities will struggle to convince markets the tests are robust enough.

Banks have already raised over €500bn from investors and taxpayers since the onset of the financial crisis, to bolster their balance sheets. But the sector is on edge ahead of the stress tests, because of the risk that regulators will call for even greater buffers against a credit crunch.

The new study, by Viral Acharya, a New York University Professor and adviser to the European Systemic Risk Board (ESRB), and Sascha Steffen, of Berlin's European School of Management and Technology, said eurozone banks would need up to €767bn to bring their capital to the level seen by the Bank of England's head of financial stability, Andrew Haldane, as needed for the banks to have withstood the last crisis.

But the €767bn figure only covers the 109 eurozone banks in the ECB's exercise who disclose detailed data about their finances, so the figure across the 128 banks being tested would be even higher.

Banks across the globe will have to meet a 3pc ratio under the new Basel III regulation, but some national authorities are pushing for a higher threshold.

The ECB will complete its Comprehensive Assessment of the eurozone's 128 biggest banks by November, in a bid to finally banish doubts about their balance sheets. The ECB's work will then feed into EU-wide stress tests.

The authors' methodology is different from the EU and ECB tests, which interrogate the financial positions of the banks and look at how much they would need to withstand specific future stresses, such as a fall in economic activity. (Reuters)

Irish Independent

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