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European Bank Stress Tests Need Rethink, Elderfield Says

Stress tests of European banks should focus less on capital benchmarks and more on “diagnostic tools” next year, one of Europe’s top bank regulators said.

Matthew Elderfield, the deputy governor of the Irish central bank and a senior member of the European Banking Authority, said stress tests that encourage banks to hoard capital may make economic downturns more severe.

It would be “sensible to recalibrate the European approach to stress testing in the next period,” Elderfield said in a speech in Berlin today.

European banks won’t face stress tests this year because they are in the process of reviewing their balance sheets to protect against the region’s sovereign-debt crisis. Banks plan to raise about 98 billion euros ($130.6 billion) in new capital by the end of June, the EBA said last month on its website.

“I would like to see that we use this breathing space wisely to consider the future design of stress tests and the operational flexibility of firewall structures,” Elderfield said.

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