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The European Central Bank (ECB) published the results of a thorough year-long examination of the resilience and positions of the 130 largest banks in the euro area as of 31 December 2013 on October 26.
“This unique and rigorous exercise is a major milestone in the preparation for the Single Supervisory Mechanism, which will become fully operational in November,” said Vítor Constâncio, Vice-President of the ECB. “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”
Twelve of the 25 banks have already covered their capital shortfall by increasing their capital by €15 billion in 2014. Banks with shortfalls must prepare capital plans within two weeks of the announcement of the results. The banks will have up to nine months to cover the capital shortfall.
The AQR showed that as of end-2013 the carrying values—or book values—of banks’ assets need to be adjusted by €48 billion, which will be reflected in the banks’ accounts or prudential requirements. Furthermore, using a standard definition for non-performing exposures (any obligations that are 90 days overdue, or that are impaired or in default), the review found that banks’ non-performing exposures increased by €136 billion to a total of €879 billion.
The comprehensive assessment also showed that a severe scenario would deplete the banks’ top-quality, loss-absorbing Common Equity Tier 1 (CET 1) capital—the measure of a bank’s financial strength—by about €263 billion. This would result in the banks’ median CET1 ratio decreasing by 4 percentage points from 12.4% to 8.3%. This reduction is higher than in previous similar exercises and is a measure of the rigorous nature of the exercise.
“This exercise is an excellent start in the right direction. It required extraordinary efforts and substantial resources by all parties involved, including the euro area countries’ national authorities and the ECB. It bolstered transparency in the banking sector and exposed the areas in the banks and the system that need improvement,” said Danièle Nouy, Chair of the Supervisory Board. “The comprehensive assessment allowed us to compare banks across borders and business models, and the findings will enable us to draw insights and conclusions for supervision going forward.”
Exercise delivers high level of transparency, consistency and equal treatment
Rigorous exercise is milestone for the Single Supervisory Mechanism starting in November
Full results of the comprehensive assessment
The results of the comprehensive assessment of the 130 most significant European banks show that the sector is very robust and capable of sustaining a severe recession, the European Banking Federation concludes from the final results of the assessment as published today by the European Central Bank, European Banking Authority and national supervisors.
AFME strongly supports the objectives of these exercises as key elements in ensuring the future resilience of the financial industry in Europe. They bring clarity and comparability to the strength of European banks, encouraging where necessary the repair of balance sheets and, ultimately, bolstering confidence in the European banking system.
The ABBL takes note of the results of the comprehensive assessment published by the ECB. The comprehensive assessment concludes the thorough review of the European largest banks before the ECB takes up its banking supervision tasks from 4 November 2014 onwards. The ABBL seizes this opportunity to reiterate its long-standing support to this un-precedent exercise, which is a necessary condition to promote transparency and to restore confidence in the European banking sector.
In this column, the authors provide a number of benchmark stress tests to estimate capital shortfalls. The analyses suggest possible capital shortfalls between €80 billion and more than €700 billion depending on the model. They find a negative correlation between their benchmark estimates and the regulatory capital shortfall, and a positive one between the benchmarks and the regulatory estimates of losses. This suggests that regulatory stress test outcomes are potentially affected by the discretion of national regulators.
Roughly one in five of the euro zone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday.
Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros (7.88 billion pounds) to be raised.
Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds.
The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi had the largest capital hole to fill at 2.1 billion euros.