ECB tests fail 25 banks with $32B shortfall

The tests are a key test of whether Europe is serious about repairing its dysfunctional banking system. The ECB has come under fire over whether the tests have been rigorous enough and the “stresses” used were realistic.

This is not the first time Europe’s banks have been stress-tested. However previous tests have been widely discredited as toothless when they passed several banks which then had to be rescued by governments as soon as the economic climate turned sour. It was the cost of propping up these banks that contributed to pushing countries like Spain close to collapse

ECB vice-president Vitor Constancio told CNBC Sunday that this time around the tests had a greater credibility.

“We had involved in the exercise almost 5,000 experts from private firms conducting the exercise on the field, ” he said.

“So I think that this exercise can only be considered as a very credible one.”

The ECB’s tests have focused on the asset quality of 130 of the euro zone’s key banks. Simultaneously, the European Banking Authority has tested 123 banks in the European Union – the 18-member euro zone and the 10 non-euro countries — measuring how well lenders can weather differing degrees of economic downturn. The EBA tests are checked by the ECB in the case of euro zone banks, or the country’s own central bank when it is outside the euro zone. In the U.K., the Bank of England will also conduct its own stress tests, with provision for bigger property losses – the results will be announced in December

Read More Live blog: Europe’s banks in focus as stress tests revealed

Europe’s economy is mired in slow growth and barely increasing prices The review is part of a broader effort to remove the uncertainty in the market that has hindered lending and weighed on the region’s troubled economy.

The ECB’s Constancio told CNBC that now the stress tests had been completed, and the bank had introduced such measures as cheap-rate long-term loans to banks to aid investment in business, the euro zone;’s banking industry would regain its confidence.

“So we hope that the new environment created by the conclusion of this exercise and our monetary policy will be more favourable for the banks to feel more comfortable to take their credit decisions, ” he told CNBC.

The ECB vice-president added that now the stress test exercise had been completed, banks can start to see a change in fortunes, with their valuations on the financial markets improving.

“After the exercise, profitability will tend to increase, and the market valuations and the development of stock prices was already anticipating that. And it will continue,” he said.

Transcript of interview with Vitor Constancio

However, some industry-watchers are not so convinced, and are uncertain that the demand for credit is actually there.

“Even if banks do become more prepared to lend now that the stress tests are out of the way,” said Howard Archer,chief UK and European economist at IHS Global Insight, “it is very far from certain that there will be increased demand for capital from the private sector in many countries given current euro zone weakness, faltering business confidence and the uncertain outlook amid geopolitical tensions.”

“If the ECB’s bank stress tests really do bolster confidence in the euro zone’s banking sector, that is a very welcome and positive development. But this will by no means be sufficient in itself to turn around the euro zone’s currently poor economic fortunes.”

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