Stress tests: Transparency is the key

First Published:	23/07/2010 15:39:13
Last Updated:	26/07/2010 08:54:10
Transparency is the key for the success of the stress tests of the 91 European banks, the foreign analysts told the media. According to Bloomberg, the success of the European Union’s bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail, investors said. Regulators are scrutinizing banks to assess if they have enough capital, defined as a Tier 1 capital ratio of at least 6 percent, to withstand a recession and sovereign debt crisis, according to a document from the Committee of European Banking Supervisors. The macroeconomic scenarios include basic macroeconomic variables (e.g. development of GDP, unemployment and consumer price index) as well as unfavourable conditions in the banking markets and a “shock” for the interest rates. The assessors haven’t so far provided full details of their criteria, raising concern among investors they will not be stringent enough. U.S. regulators published the metrics they used to test their banks before they released their results last year. U.S. bank stocks rallied 36 percent in the seven months following the trials. Analysts say the banks most likely to fail are Germany’s state-owned lenders and Spanish savings banks. Europe’s largest banks from Societe Generale SA to Barclays Plc and Deutsche Bank AG are expected to come through the tests without needing to raise additional capital, according to analysts. Information are similar for Agricultural Bank. Nova Ljubljanska Banka d.d., Slovenia’s largest bank, said it needs to raise 600 million euros following the tests. The results will be released when European markets are closed, giving banks that fail the test time to raise funds to fill their capital shortfall before markets re-open. Officials have yet to spell out how they would deal with a bank that fails the tests and how additional capital may be provided. EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday the union has the means to fix any problems that may be found in the tests. Cypriot Finance Minister, Charilaos Stavrakis expressed his optimism for the results of the stress tests of Bank of Cyprus and Marfin Popular Bank. CEBS will publish the aggregate test results from 6 p.m. National regulators and banks will then publish their results on an individual basis, according to CEBS’s Web site.

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