Banks Need to Survive 7% GDP Drops Say New Stress Test Rules

European banks will be expected to prove they can survive a 7% drop in GDP under new tougher stress tests unveiled by the regulator.

It says banks should also be able to withstand a 14% fall in house prices and up to a 19% drop in share prices under a worst-case scenario.

The tests are designed to try and prevent further taxpayer bailouts.

The regulator said the tests would “address remaining vulnerabilities in the EU banking sector”.

“It will provide a common framework for the next stops to be taken by supervisors and banks,” said European Banking Authority (EBA) chair Andrea Enria.

The tests are much tougher than the EBA’s 2011 stress tests when it projected a worst-case scenario of just a 0.5% fall in GDP.

At the time, the tests were widely criticised for being too soft, particularly after 18 of the EU’s 27 countries at that time had weaker growth than the “adverse” case they were tested for.

“The key is that the scenario is at least as deep and dark as the great recession, the financial crisis of 2008/2009,” said Mark Zandi, Philadelphia-based chief economist at Moody’s Analytics.

via BBC

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza