In an effort to restore the transparency and reliability of the European banking system, European Union authorities have agreed to bring more banks under the public stress test. The number of financial institutions that are subject to the European Union stress test will increase from 22 big banks last year to include another 60 to 120 banks.
As result of this widening of the stress test net, banks such as German Landesbanken and the Spanish savings banks would be included. Though these banks are not the largest banks in the region, their financial weakness prompted a market uncertainty. Additionally, major Irish banks that had not been included in the prior year’s test will be incorporated this year.
Banks will be tested to see whether they have sufficient financial strength to survive serious economic shocks and whether they can endure the impact of a possible sovereign debt default in the Euro-zone.
The stress test would be completed by mid-July, and the results are scheduled to be released in the latter half of the month. This year, the results would be disclosed on a bank-by-bank basis and the test parameters will also be published. This is in contrast to the last year’s stress test, when a small number of banks were covered and only aggregate results, were published. European banks subjected to this stress test included Deutsche Bank AG (DB), Commerzbank AG and others.
Concerns were raised about how the European banks will cope following the shutdown of the special loan facility by the European Central bank to the Euro-zone lenders. As a result, shares of Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA) have been facing significant price volatility.
The decision to process more banks through the stress test comes amidst pressures on European banks. Recently, Spain’s Central Bank has announced the merging of the cajas, along with an infusion of new capital in the banking system for the restructuring and strengthening of the balance sheets of the consolidated banks. The move comes as part of the measures adopted by the Spanish authorities to restore the confidence of investors in the health of the Spanish banking system.
Spain’s Central Bank announced the merging of 39 of the country’s 45 savings banks into several institutions and a capital infusion of €11 billion ($13.5 billion) in public funds to reorganize and boost the capital levels of the merged entities. The largest merged entity will include seven institutions and would become the third-largest bank by financial assets in Spain, following Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.
As of now, we remain cautious about the overall health of the European banking system and wait for stress test results to unfold.
Read the full analyst report on “DB”
Read the full analyst report on “STD”
Read the full analyst report on “BBVA”
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