The ECB’s Health-Check of the Banks – a Necessary but Not Sufficient Step for Reforming the Euro

Written by | Sunday, January 25th, 2015
European Values

Dominique Perrut (Robert Schuman Foundation)

The eurozone crisis was an important milestone for the development of the Economic and Monetary Union (EMU). The EU politicians tackled the crisis by efforts intended to reform the EMU. The basis of the reform efforts, which have been going on since 2012, rests on two essential pillars. The first one is good economic governance; the second is the Banking Union. However, the implementation of such steps proves to be uneasy and that is why the Union made one significant pre-step before the establishment of the Banking Union. This pre-step, or a “stress test”, is essentially an assessment of the resilience of EU banks to adverse economic developments. It was conducted in two phases and its main objective was to consolidate the Union’s banking sector and boost its credibility and self-confidence.

The first phase included an all-encompassing evaluation of individual banks on the basis of certain criteria, the first being the amount of total assets that were to exceed 27 billion euros. Consequently, ‘stress-testing’ targeted the three most important banks in a given country, whose total assets exceed 20 percent of the GDP of the country where they are established, banks with high cross-border activities, and banks that have requested or received public financial assistance from the Union. If a bank met at least one of the afore-mentioned criteria, it became automatically subject to the Union’s control. As a result, 130 banks operating in the eurozone have undergone the tests, which represent 81.6 percent of all banking accounts in the Member States, where the euro is used as a currency and 24 percent of all accounts worldwide.

The second phase concerned the actual stress test which was conducted using two distinct scenarios. One scenario simulated a minor financial crisis, while the other one a crisis of a larger magnitude. With regard to the extremely satisfactory results, it could be concluded that the eurozone banking system is now overall in a good condition. From the total number of 130 tested banks, only 14 reported deficiencies, which is not a high number. These banks then were obliged to submit the so-called recapitalization plan to the European Central Bank (ECB), which is designed to cover capital shortfall within six or nine months, depending on the crisis scenario that the bank was not capable of successfully managing. Despite the positive results of the stress test, we should also bear in mind several persisting problems. One of them is the fact that the actual Banking Union cannot reliably function without the introduction of a sophisticated plan of economic governance. One of the plausible solutions to this much-discussed problem could be the Juncker’s plan for financial investment, characterized by direct financing of the eurozone economy by the Union.

(The study can be downloaded here:http://www.robert-schuman.eu/en/doc/questions-d-europe/qe-332-en.pdf)

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