Stress Tests Toughened as 90 Banks to Face EU Capital Exams
The headquarters of Irish Life & Permanent Plc
Aidan Crawley/Bloomberg
All banks tested last year will be included in the exams, while Ireland’s Irish Life and Permanent Plc, Norway’s DnB NOR Bank ASA, Nykredit Bank from Denmark, Slovenia’s Nova Kreditna Banka Maribor and Oesterreichische Volksbank AG from Austria will be tested for the first time.
All banks tested last year will be included in the exams, while Ireland’s Irish Life and Permanent Plc, Norway’s DnB NOR Bank ASA, Nykredit Bank from Denmark, Slovenia’s Nova Kreditna Banka Maribor and Oesterreichische Volksbank AG from Austria will be tested for the first time. Photographer: Aidan Crawley/Bloomberg
April 7 (Bloomberg) -- Simon Maughan, co-head of European equities at MF Global, talks about the effect of a possible increase in euro-zone interest rates on banks' balance sheets. He speaks with Mark Barton on Bloomberg Television's "On The Move." (Source: Bloomberg)
April 8 (Bloomberg) -- James Babicz, U.K. head of risk at SAS, talks about European bank stress tests. He speaks with Bloomberg's Christos Kaitatzis. (Source: Bloomberg)
European regulators will use a tougher measure of capital on 90 lenders in this year’s stress tests following criticism last year’s weren’t stringent enough.
Banks will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, the European Banking Authority said on its website. Lenders won’t be allowed to use some types of non-voting capital permitted by German bank supervisors, known as silent participations, to calculate the results, the EBA said.
Last year’s tests, which allowed national regulators to use their own capital definitions, were criticized by bank analysts for not being tough enough. Lenders in the 27-nation region were shown by regulators to need only 3.5 billion euros ($5 billion) of new capital, about a 10th of the lowest analyst estimate.
“The tests will be tougher than last time, but investors will likely have lingering doubts about the safety of some of the banks and their balance sheets,” said Lex van Dam, a London-based fund manager at Hampstead Capital LLP, which oversees $500 million. “The test scenario may be not conservative enough, but it seems it is tough enough to force some banks to raise capital sooner than expected.”
At least five banks were added to the list of those examined last year. Ireland’s Irish Life and Permanent Plc, Norway’s DnB NOR Bank ASA, Nykredit Bank from Denmark, Slovenia’s Nova Kreditna Banka Maribor and Oesterreichische Volksbank AG from Austria will be tested for the first time. The EBA is due to announce the results by the end of June.
Irish Banks
In 2010, Allied Irish Banks Plc (ALBK) and Bank of Ireland Plc passed the EU’s examination, while Anglo Irish Bank Corp. wasn’t tested. Later in the year, a liquidity shortfall caused when depositors withdrew funds from Irish lenders helped prompt European governments and the International Monetary Fund to agree on an 85 billion-euro aid package for the country and the nationalization of Anglo Irish.
“Make no mistake, 5 percent of Core Tier 1 is harder in comparison with last year,” James Babicz, head of risk at business analytics company SAS, said in telephone interview in London today. “But I think you have to look at how risky a bank is rather than look at a static capital threshold.”
This year’s tests will include a review of how banks would handle a 0.5 percent economic contraction in the euro area in 2011 as well as a 15 percent drop in European equity markets. Another scenario will simulate the effect on assets held in bank trading books of a loss of 3.5 percent on German 10-year bonds and 7.6 percent on British debt.
Sovereign Bonds
“We welcome a transparent and coordinated approach to stress tests that allows for a continuous assessment and ensures a level playing field,” Christian Clausen, chief executive of Nordea Bank AB (NDA) and president of the European Banking Federation, said in an e-mailed statement today.
The EBA tests will also examine the effect of a 75 basis- point-jump in interest rates on European sovereign bonds and an increase in short-term inter-bank financing costs of 125 basis points. Losses on sovereign bonds held to maturity won’t be tested, according to the EBA.
Supervisors agreed “that a higher threshold than the legal minimum is necessary in assessing the resilience of banks in adverse circumstances if credibility and confidence in the banking sector is to be restored,” the EBA said.
The FTSE 350 Banks Index (F3BANK) rose 0.06 percent today.
Germany’s Bundesbank and financial regulator BaFin have called for the stress-test information submission deadline to be extended by two weeks, the central bank said yesterday. The original deadline was the end of April, the Bundesbank said.
Landesbanken
Regional German banks, including Norddeutsche Landesbank and Landesbank Hessen-Thueringen, have complained that the EBA’s tighter definition of capital may lead to some lenders failing the exams.
At Landesbank Hessen-Thueringen, or Helaba, silent participations -- the funds the state-owned banks receive from savings banks and regional governments -- accounted for more than 50 percent of the total in 2010. At Norddeutsche Landesbank, or NordLB, it amounted to 30.5 percent of capital in September, company figures show.
The VOeB Association of German Public Sector Banks “fears the stress test may convey false signals to the markets,” Stephan Rabe, a spokesman for the Berlin-based group, said in an e-mailed response to questions after the EBA published its requirements. “Therefore, the test doesn’t contribute to the transparency sought by the EBA.”
5 Percent Level
Banks that fall below the EBA’s 5 percent level will have to arrange capital injections with their national supervisors.
“It is up to the governments, if there is anything to do in terms of recapitalization after the stress tests, to stand ready to do whatever would be necessary,” Jean-Claude Trichet, the president of the European Central Bank, said at a press briefing in Budapest.
Core Tier 1, as defined by global regulators in the Basel Committee on Banking Supervision, largely consists of banks common stock and retained earnings. The 2010 tests were conducted against a pass rate of six percent Tier 1 capital, which encompasses a broader range of securities including hybrid instruments such as preference shares.
To contact the reporter for this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net.
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.
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