What the ECB stress tests on banks missed

The ECB stress tests and Asset Quality Review (AQR) on European banks have still left some important risks not tested, a rating agency said.

Operational and litigation risks were not subject to the ECB stress tests, Sam Theodore, a team leader and bank analyst at Scope Ratings, said in a statement.

As the latest flurry of headlines about fines imposed on banks across the globe shows, the risk of litigation is very high, especially for globally important financial institutions.

“Aside from asset quality and other areas of risk which can be addressed via tighter prudential metrics, conduct risk — both in market activities and with respect to retail customers — is less measurable yet very relevant for the banking industry going forward,” Theodore said.

Scope Ratings was launched in 2002 in Berlin and has analysts in the U.K., Germany and France looking at credit risks for SMEs, banks, structured finance transactions and asset-based funds across Europe.

The ECB stress tests and AQR looked at 130 banks with assets worth about €22 trillion, accounting for 81.6% of the assets under the Single Supervisory Mechanism – which will start operating on November 4, when the ECB takes over as single supervisor.

A capital shortfall of €24.6 billion was identified for 25 participating banks, after their projected solvency ratios under two scenarios were compared with the thresholds set for the ECB stress tests.

ECB stress tests

ECB stress tests showing capital shortfalls as a percentage of risk-weighted assets. Source: ECB

But banks have been busy this year raising capital before the exercise, to ensure they pass. If capital raised this year is taken into account, the net capital shortfall is only €9.5 billion across 13 banks.

The 13 banks are:

  • Italy: Monte dei Paschi di Siena, Banca Carige, Banca Popolare di Milano, Banca Popolare di Vicenza
  • Greece: Eurobank, National Bank of Greece
  • Portugal: Banco Comercial Português
  • Austria: Oesterreichischer Volksbanken-Verbund
  • Ireland: Permanent TSB
  • Belgium: Dexia
  • Cyprus: Hellenic Bank
  • Slovenia: Nova Ljubljanska banka, Nova Kreditna Banka Maribor

The ECB stress tests have also helped shed light on one “very relevant” area where things were not clear before: the fact that forborne loans were “the largest factor of the impaired asset adjustment during the AQR,” Scope’s Theodore said.

He noted that national supervisors in the eurozone did not always display “consistent and transparent norms for loan forbearance,” and this has been an important factor in the inconsistencies in reporting asset quality across EU countries.

In the aftermath of the ECB stress tests, it is likely that the ECB, once it becomes single supervisor, “will focus more thoroughly and in a more consistent manner on banks’ loan forbearance practices.”

However, overall the ECB stress tests are positive for the eurozone banking sector as they should strengthen market confidence, since no major negative surprises emerged, Theodore added.


3 thoughts on “What the ECB stress tests on banks missed

  1. Pingback: ECB bond buying most likely in 2015

  2. Pingback: Dress like a zombie bank this Halloween, says analyst

  3. Pingback: European stock markets facing headwinds - Market Moving News and Views

Comments are closed.