11 March 2011

FT: European banks' stress test criteria is softened

The chairman of the European Banking Authority (EBA) has defended the rigour of this year's planned bank stress tests.

Seven out of ninety-one banks failed last year’s derided European stress tests, which ignored some measures of core tier one capital, and required banks only to show that they would retain a 6 per cent buffer of more widely-defined tier one capital when subjected to an adverse stress scenario.

Core tier one capital is considered the best form of bank capital to absorb potential losses, and its ratio to a bank’s risk-weighted assets is one of the most important measures of an institution’s financial strength. The ratio would be more difficult for banks to achieve than the measure applied in a widely-criticised stress test exercise last year that failed to quell market fears about the health of Europe's banks.

However, regulators have still not yet decided on how to treat the issue of country differences in the definition of core bank capital, which threatens to muddy this year's stress testing exercise.
 

© Financial Times