Brussels, 31/10/2014 (Agence Europe) - The Finance Watch organisation that defends the rights of citizens in the financial field has welcomed the results of the assessment of the strength of European banks, but highlights weaknesses in this unprecedented Asset Quality Review (AQR) by the European Central Bank and the European Banking Authority (EBA).
More than 50% of banks' credit risk-weighted assets were covered by the AQR, and the significant AQR findings should help to clean up bank balance sheets and restore confidence in the banking sector, explains Finance Watch in a press released issued on Wednesday 29 October. Finance Watch welcomes the disclosure of previously unpublished data in an aggregate manner or for financial institutions (see EUROPE 11185).
The AQR results, however, reinforce Finance Watch's view that a binding leverage cap is required.
The organisation says that the stress test parameters used by the EBA do not take all risks into account. The assumption of a static balance sheet ignores the second-round effects of stress and the way banks react speedily though asset fire sales.
Moreover, the decision not to apply the new capital rules in full (which comes into force across the EU in 2019) but to use transitional measures might undermine the transparency and comparabilty of risks. The EB itself admits that this led to an overassessment of bank assets of €126.2 billion.
The EBA stress test results show that the average solvency ratio has fallen from 11.1% to 8.5% (CET 1) (see EUROPE 11185) and to 7.6% when all the capital requirements are applied that come into force in 2019. The minimum solvency ratio pass rate was set at 5.5% of CET1 capital. (MB)