For the first time since its financial crisis struck in 2008, Europe is carrying out stress tests that could force change at banks with strong political connections.
The European Central Bank is leading the latest attempt to uncover problems that would endanger any lender’s survival in a future crisis. Unlike the three previous efforts, which were hamstrung by national authorities’ reluctance to expose their banks’ weaknesses, Frankfurt has a vested interest in revealing problems before it takes over as supervisor in November.
“The last time the process was done at the national level by the same old supervisors,” said Nicolas Veron, an expert on banking at the Bruegel think-tank in Brussels and the Peterson Institute for International Economics in Washington.
“Here, we have a completely new pair of eyes and the ECB has every incentive to be tough because the ECB doesn’t own the present failures but it will own the future failures.”
The tests are likely to force some banks into raising more cash to prove they can withstand another downturn without the taxpayer-funded rescues that a number needed in the last crisis.
But crucially, European Union rules restricting state aid have been toughened since the last stress tests in 2011. This means any bank seeking government money to fill a hole revealed by the ECB review may have to restructure its business, as well as forcing losses on shareholders and junior creditors if the European Commission decides the injection represents state aid.
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.