European Bank Stress Tests Could Face National Hurdles

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.

via Reuters

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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