Study says ‘true’ eurozone stress test could show over US$1 trillion shortfall in banks

An objective stress test of the eurozone’s biggest banks could reveal a capital shortfall of more than 770 billion euros (US$1 trillion) and trigger further public bailouts, a study by an adviser to the European Union’s financial risk watchdog and a Berlin academic has found.

The study and others published ahead of the EU stress tests, whose results are due in November, are important because they set the expectations against which markets will judge the credibility of the European Central Bank’s attempt to prove its banks can withstand another crisis without taxpayer help.

If official figures are far below independent estimates, authorities will struggle to convince markets the tests are robust enough, particularly given two previous rounds of EU tests that failed to reassure markets of banks’ health.

Banks have already raised over 500 billion euros from investors and taxpayers since the onset of the financial crisis, to bolster their balance sheets and help ward off a repeat of the 2008-09 financial crisis.

But the sector is again on edge ahead of the stress tests, because of the risk that regulators will call for even greater buffers against another credit crunch.

The reference is to a 2012 speech where Haldane said the world’s largest banks would have needed equity equal to 7 percent of their total assets to guard against failure in the financial crisis.

But the 767 billion-euro figure only covers the 109 eurozone banks in the ECB’s exercise which disclose detailed data about their finances, so the figure across the 128 banks being tested would be even higher.

Banks across the globe will have to meet a 3 percent ratio under the new Basel III regulation, but some national authorities are pushing for a higher threshold.

The authors’ methodology is different from the EU and ECB tests, which interrogate the current financial positions of the banks and look at how much they would need to withstand specific future stresses, such as a fall in economic activity, a stock market crash or a global credit crunch.

“Balance sheets are not transparent enough for us to do what the ECB will do,” Steffen said. But their independence could be an advantage.

A separate analysis assuming only that banks would have to write down non-performing loan portfolios suggested a capital shortfall of 232 billion euros, based on a “common equity Tier One” ratio of 8 percent, a benchmark of financial solvency.

The EU has not yet said what benchmark will be used, but reports last week said the ECB favored a threshold of 6 percent for a financial solvency.

Full article: Study says ‘true’ eurozone stress test could show over US$1 trillion shortfall in banks (Shanghai Daily)

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