Brussels, 31/01/2014 (Agence Europe) - On Friday 31 January 2014, the European Banking Authority (EBA) published details of the methodology to be used for the 2014 bank stress tests to be carried out on 124 banks in 22 EU member states and published in October.
The stress tests will measure banks' ability to deal with three consecutive years of financial turbulence. Under the EBA's baseline scenario, banks will need to hold at least 8% of their assets as optimal quality assets (CET 1), which must not be allowed to fall below 5.5% if a crisis breaks out. In the 2011 stress tests, the EBA used 5% (see EUROPE 10356).
Bank solidity will be measured in terms of risks to their retail banking and investment. For credit strength, there will be tests for risks due to counterparty bankruptcy (countries, for example, along with banks and households). For market risk, fluctuations will be assessed in terms of fair value, including sovereign debt holdings. Further aspects to be considered include the cost of financing and operational risks. Supervisory bodies will be given the power to include specific risks in their home market but, in order to make it easier to compare and contrast results, these special aspects will be covered in a separate report.
From now until April there will be talks with stakeholders to fine-tune the methodology. The stress test results will be published in October, probably at the same time as the asset quality reviews of the European Central Bank (tests the ECB is carrying out before it becomes the eurozone bank supervisor in November).
Like the ECB within banking union, the EBA's credibility will be assessed in the light of the stress tests. In 2011, eight banks (five Spanish, two Greek and one Austrian) failed the tests and were forced to recapitalise. (MB/transl.fl)