Most European banks have performed well in the latest round of stress tests, although more needs to done. Under the latest test scenario, some €269 billion would be wiped off the capital bases of the banks. The health check of 51 lenders in the European Union was carried out by the European Banking Authority and assessed how much capital banks would use up in adverse conditions, including an economic downturn.

Italy’s Banca Monte dei Paschi di Siena SpA was at the bottom of the pack, the only lender to have its capital wiped out in the exam, as it struggles against the backdrop of an Italian banking crisis. RBS, which was bailed out by the government in 2008 with the UK taxpayer continuing to hold a 73% stake in the bank, also performed poorly.

Overall, though, UK banks were in a secure and resilient position, according to BBA CEO, Anthony Browne. “The results demonstrate that the extensive banking reforms since the financial crisis are working and the sector is prepared to withstand a severe economic downturn,” he says. “Now banks have shown they are resilient to surviving a severe test they can continue to plan their activities from a financially sound and stable position and get on with their job of supporting job creation and growth.”

The real test still lies ahead, however, argues Burcu Guner, Senior Director at Moody’s Analytics. The results will be used as a crucial input into the Supervisory Review and Evaluation Process which will allow for better risk assessment through not only quantitative but also qualitative elements such as internal governance as well as a more holistic assessment of forward-looking vulnerabilities. “The main challenge for banks will be to demonstrate that the quality of their data and models is sufficient to reliably identify future risks and that they have sound processes in place to manage these risks,” he comments. “The qualitative results of the stress test will be incorporated into the Supervisory Review and Evaluation Process and can thus have an impact on Pillar 2 capital requirements – all this makes the spirit of this year’s exercise very different from previous exercises that focused more on the ‘pass or fail threshold’.”

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By Scott Thompson

by Scott Thompson
Scott is Senior Editor at IBS Intelligence. You can follow him on Twitter and contact him at: