Twenty-Four European Banks Fail Stress Tests

Written by | Tuesday, October 28th, 2014

The European Banking Authority (EBA) announced that twenty-four European banks had not passed “stress tests” of their finances. The blacklisted banks now have nine months to reinforce their finances or face the possibility of being shut down. The stress tests were based on the banks’ financial health at the end of last year. Ten of the twenty four banks have taken measures to improve their balance sheets since then. The remaining twelve are based in the eurozone. The stress tests were “taken” by 123 European banks to determine whether they would be able to survive another financial crisis.

The list of fourteen banks that have not yet taken steps to bolster their balance sheets includes four Italian banks, two Belgian banks, and two Slovenian banks. The worst affected was Italian bank Monte dei Paschi, which missed capital worth €2.1 billion. The stress tests nevertheless reveal that banks are in a better financial health than they were three years ago, the last time when the tests were taken. However, many analysts remain skeptical about the way the tests work as previous rounds of testing failed to miss the subsequent collapses in the Irish banking sector and of Dexia, the Belgian bank.

Importantly, the environment in which banks are operating nowadays is different to that of 2011. The profits that banks are allowed to make are capped but net income is slashed by 20 percent. Moreover, there is greater transparency in data usage and more certainty given to investors. Moreover, the Asset Quality Review, which looks at banks’ loans and exposure to the debt of national governments, has been changed as well.

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