141026 - ECB assessment of banks

Euro Watch
Bank tests a key milestone
Group Economics
Macro & Financial Markets Research
Nick Kounis + 31 20 343 5616
Joost Beaumont
26 October 2014
The results of the ECB’s comprehensive assessment of the banking sector are very encouraging…
…it represents a more rigorous test compared to past ones in the eurozone as well as the US…
…in addition most of the capital raising has already been done and the rest looks manageable
We see the exercise as a key milestone in the eurozone economy’s recovery process
Comprehensive assessment relatively tough
be filled within two weeks. These shortfalls will need to be
The ECB’s comprehensive assessment of 130 banks was
covered in 6 months (where these were identified in the
relatively tough and hence represents a credible barometer of
AQR/baseline scenario) or 9 months (for those identified in the
the health of the eurozone banking system. The review
adverse stress test scenario).
consisted of an asset quality review (AQR), which assessed
whether bank assets were valued correctly. The AQR showed
A key milestone in Europe’s recovery process
that as of the end-2013, banks’ assets needed to be adjusted
Overall, we see the ECB’s comprehensive assessment of
by EUR 48bn, while non-performing exposures increased by
banks as being a key milestone in the eurozone economy’s
EUR 136bn. Furthermore, a stress test was conducted
recovery process. This does not mean that the banking sector
assessing the impact of bank balance sheets under an
is now somehow magically transformed. It is still adapting to a
adverse scenario, in which banks were required to maintain a
post-crisis world. In addition, a recovery in bank lending will
minimum CT1 ratio of 5.5%. In this scenario, which assumed a
depend on a recovery in the demand for loans. However, there
3-year collapse of GDP of 6.6%, banks’ aggregate capital was
are a number of important positives. The assessment was
reduced by EUR 216 bn, while risk-weighted assets increased
relatively tough, most of the capital short-falls have already
by EUR 860bn. This led to a decrease in the CET1 ratio for the
been closed, and the rest look manageable from a macro or
median participating bank to 8.3% in 2016 from 12.4%. This
country perspective. This means that the banking sector is now
four percentage point decrease was almost double the one
extremely well-capitalised and the exercise has also provided
seen under the EBA exercise in 2011 (2.1%). It also compares
favourably to this year’s stress test in the US (2.9%).
Meanwhile, the assessment is being supplemented by a range
Much of the capital shortfall has already been plugged
of other measures by the ECB, including ABS and covered
The results of the assessment showed that 25 banks failed the
bond purchases, and the TLTROs. Furthermore, recent
test. The total capital shortfall was EUR 24.6bn, but banks
evidence on the ground points to improvement. The ECB’s
have already filled EUR18.6bn of the gap, leaving only 12
Bank Lending Survey has shown over recent quarters that
banks that still need to raise EUR 9.5bn of new capital.
demand for loans is recovering, while banks are easing their
Overall, during 2014, around EUR 40 bn of net capital was
lending conditions. We think that the ECB’s measures and a
raised by banks. As not all banks that raised capital had a
moderate recovery in the economy mean that these trends will
shortfall, the initial shortfall was offset by around EUR 15bn.
continue, leading to a gradual improvement in bank lending.
Greece and Italy prominent in country breakdown
Evidence from banking crises in other countries suggest that
Turning to the country breakdown, the biggest short-falls
credible intervention to clean-up bank balance sheets and
relative to the banking system’s risk-weighted assets were in
recapitalise the system tends to be a watershed in the healing
Cyprus (around 6%) and Greece (around 4%). They were
process from the financial crisis. The US experience in 2009
followed at some distance by Portugal, Italy, Slovenia, Ireland,
was a classic example of this. It took the eurozone a number of
Austria and Belgium (all less than 1%). In terms of absolute
attempts to get it right, but it seems it is finally there.
amounts, the lion’s share of the initial capital shortfall was in
Italy (EUR 9.7bn) and Greece (EUR 8.7bn). Following the
capital raising, Italian and Greek banks account for around
two-thirds of the gap (around EUR 3bn in each case), while the
rest is spread between the other countries. In cases where
there is a remaining shortfall, banks are requested to take
remedial actions and submit capital plans of how shortfalls will
Bank tests a key milestone - 24 September 2014
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