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Banking: AQR aftermath throws up more questions for banks

Investors greeted the European Central Bank’s asset quality review with little more than a shrug. They view it as merely the first step on a journey to enhanced and uniform bank supervision that might take a decade to complete. They are much more worried about the sustainability of banks’ business models and whether or not they can even earn enough to service their growing capital stack.


A key aim of the asset quality review and stress test of the 130 largest banks in the euro area was, according to Vítor Constâncio, vice-president of the ECB, to “boost public confidence in the banking sector”. Constâncio added: “By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

Though the exercise serves to remind investors just how far Europe’s banks have already gone in building big capital buffers, whether it will actually achieve any of Constâncio’s aims remains in doubt.

Even if the AQR does bring a promise of greater transparency and more harmonized disclosure of banks’ non-performing exposures, which might ease investors’ concerns about hidden problems, that does not mean that equity and debt investors suddenly see Europe’s banks as attractive places to put more of their money. The markets reacted to the comprehensive assessment with seeming indifference.

Andreas Doerrenhaus, portfolio manager in BlackRock’s unconstrained fixed income team
Looking with a longer-term perspective, I do not think the entire capital structure for banks is appropriately priced right now

Andreas Doerrenhaus

Andreas Doerrenhaus, portfolio manager in BlackRock’s unconstrained fixed income team, itemizes important remaining concerns.