The European Banking Authority has released the information about its latest health check, the results of which will be published in Q3. It will test several European Union banks on “four systemic risks that are currently assessed as representing the most material threats to the stability of the EU banking sector.” Uniquely, unlike previous year’s tests, this test will not be pass or fail, rather the results will be discussed individually with each bank in turn, regardless of the “score” it receives. They have retooled the scoring system to reflect current potential climates and worst-case scenarios that are -unfortunately- quite possible for a bank to experience.
The banks will be tested on the ability to raise funds in thin bond markets in a shrinking economy hit by tumbling commodities and property prices. The question posed is: can a bank survive a confluence of events that include emerging market shock, stagnant profitability, and increasingly unmanageable public and private sector debt?
In the past, a bank that is viewed as having failed the test was seen by investors, in the past, as needing to raise capital. However, with the test being retooled and higher scrutiny being placed on the test, there are those who grow weary of how practical and useful this really is as an inspection for the health of a bank who might need to weather a storm.
The test is going to pore over every detail of how 51 banks, covering 70% of the bloc’s banking sector (37 of which are from the euro zone) can withstand any number of combinations of shocks and unfortunate events over the course of a three year period. For the first time, these regulators will also be asking individual banks to attempt to put a figure on possible future fines for misconduct and how it could dent capital buffers of the institutions, and while that information will be taken into account, it will not be published with the results
“In light of falling rates and a clouding outlook for global growth recently, it remains to be whether the assumptions keep pace with reality,” analysts at Commerzbank wrote in a note before the test scenarios were published on Wednesday.
They will test market illiquidity, a rise in funding costs for banks, low profitability (though negative interest rates will only feature amongst the shocks to assets held in the trading books, and not to overall balance sheets.) and shadow banking or entities that carry out banking-like activities involving credit et al.
Shares in banks have not been faring well as investors begin to worry about the ability of lenders to make money when interest rates are already very low, and may possibly be cut lower in order to stimulate economic growth. “These scenarios are not that far from the fears priced in today in bank valuations,” analysts at KBW Research said in a note to clients on the EBA’s announcement. “These stress tests should have limited impact on the banks capital plans, in our view”
Victor Notaro is an accomplished Corporate Banking Executive with a demonstrated record of success leading consultative and relationship management strategies in the financial services industry. Victor Notaro is skilled at building and managing high performing teams of professionals in commercial and corporate banking, fostering relationships with middle market and multi-billion dollar companies. Victor Notaro’s record reveals exceptional performance in the development of business capital strategy, with expertise spanning start-up of business units, leading YOY revenue growth, and producing sales in the millions of dollars. Victor Notaro is the Senior Vice President, Corporate Banking / MidCorporate Banking at Citizens Financial Group.