EBA stress tests are past their sell by date
Stress test results are meant to reassure on bank resilience, but they no longer seem to address banks’ key risks.
The European Banking Authority (EBA) stress test results came and went at the start of November and nobody paid them much attention. Are they even worth the effort anymore?
This now looks like a test that the examiners – the EBA, the European Central Bank (ECB), national central banks – have designed for their charges to pass easily and which is chiefly intended to reassure investors what a wonderful job the examiners have done in forcing banks to hold larger amounts of higher quality capital to protect against a severe downturn.
The EBA says the adverse scenario for the 2018 test was more severe than for any previous such EU-wide exercise.
Maybe it is.
Investors can decide for themselves how dystopian is a cumulative fall in GDP over three years by 2.7%, with unemployment reaching 9.7% by 2020, and houses prices and commercial real-estate values falling by around 20%.
Not especially, would be our own view.
The test applied to the end-2017 balance sheets of 48 EU banks comprising 70% of total EU banking system assets. The headline is that from an aggregate starting point ratio of 14% fully loaded common equity tier 1 (CET1), the system would see its ratio fall to just 10.1%