Experts state that the stress test for European banks carried out by the European Banking Authority (EBA) is not strict enough. According to these economists the scenarios that have been passed in the test only consider a “relatively mild” economic downturn. A crisis as severe as in 2008, was not included, causing a “distorted image”.
The European Banking Authority published the results of the 2016 stress test on Friday. The regulator concluded that most large banks in Europe are able to survive another (small) financial crisis.
This years stress test included the 51 largest European banks. According to the European Central Bank (ECB) they include a total of 70 percent of the banking sector in Europe. In the previous tests, taken in 2011 and 2014, more banks were part of the study.
The results of the stress tests for European banks left their mark on the stock exchanges on Monday morning. The share prices of several major banks were under pressure, after unexpected results in the test.
In Amsterdam, ABN Amro lost 3 percent in the AEX index. The bank saw its capital buffer in the worst-case scenario of the simulation decline by 6 percentage points. This decline was, according to analysts at KBC clearly larger than expected. At ING, a smaller decrease in the capital position was measured. After a positive start there was a decline of 1.3 per cent.
In Frankfurt, Deutsche Bank and Commerzbank lost 2 and 3.3 percent respectively. Both banks ended Friday in the lower regions of the stress test. This also applied to the Italian UniCredit, which lost nearly 7 percent of market capitalization in Milan. Monte Dei Paschi, one of the most distressed Italian banks ended last in the EBA study. It would completely collapse in the event of economic distress. However, due to a rescue plan that was presented prior to the outcome of the stress test, the ailing bank won more than 3 percent on the stock market.
The potential effects of a Brexit might even put more pressure on bank stocks and other financials. Furthermore, weak capital ratios, ever growing portfolios with bad debt and a relatively small economic growth, create an environment for heavy times.