EU stress tests easier than 2010

THE European Banking Authority (EBA) yesterday began rolling out stress tests on 88 of the region’s banks, which together hold 65 per cent of EU assets.

Europe has promised a more credible set of tests after only seven banks failed the last round in 2010 – none of them Irish, despite the subsequent nationalisation of the country’s remaining banks.

However, the worst-case scenarios that the EBA will use for its tests, designed by the European Central Bank, are less severe than those used in the 2010 tests. It involves a 0.5 per cent fall in the euro area economy this year, and a 15 per cent drop in European equities – less harsh than the overall 20 per cent drop modelled in the 2010 tests.

Markets were hoping that a rigorous process could force banks into raising capital by highlighting their exposure to real estate and sovereign debt crises.

UK banks are expected to fare well, with PricewaterhouseCoopers’ Richard Barfield saying: “We would expect the results of this round of stress testing to reveal UK banks to be in a stronger position than in 2010.” The bank tests will be a key moment for the EBA, which was established in January, to prove its credentials as a regional regulator.

Germany had been pushing for the results of the tests to remain private, but Spain and other states won an agreement to publish them.