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“We believe that the impact on the banks that we rate is likely to be limited. However, the reviews could bring to light new information, implying that a bank’s creditworthiness is weaker than the currently available information suggests,” S&P said in a statement Tuesday.
The ECB hopes this year’s tests will appear more credible than those conducted in 2010 and 2011, which were widely seen as being too soft on banks that were showing serious strains. Part of the problem was the authorities relied on the banks’ own figures, which sometimes were inaccurate. This time, the ECB is working with national regulators to conduct its own analysis of banks’ balance sheets.
The new round of stress tests, set for release at the end of this month, will evaluate banks’ 2013 numbers and subject them to hypothetical scenarios under which the EU suffers a deep economic downturn. Banks unable to withstand the shock would have to raise capital or sell assets.
The S&P report suggest that this, in turn, might spur credit ratings changes.
“This could be the case if, for example, the new findings indicated that a bank’s risk and valuation policies were deficient or that its capital position or prospective earnings outlook have worsened, which in turn could have knock-on effects on its business stability and funding and liquidity,” the firm said.
Full article on Wall Street Journal