Too Much to Handle: European Banks Fail Enhanced Stress Test

The European Central Bank and the European Banking Authority announced the results of a nearly yearlong assessment of the finances of 150 banks. 25 banks failed the stress test and 14 banks barely passed the test requiring these banks to strengthen their balance sheets.

These tests require banks to have enough capital to survive a crisis that would cause Europe’s economy to fall 7% and its unemployment rate to rise to 13%. These stress tests are part of an effort to reassure investors and the public that European lenders are strong after the Great Recession and the European Crisis.

The recent stress test has been widely applauded for being tougher this time around but many investors wished it had been stronger. Several investors wanted banks to further strengthen their balance sheets. Philippe Bodereau, global head of financial research at Pimco stated, “ I would have preferred they be a bit tougher and force more [banks] to raise capital.” The transparency of these tests could help improve confidence.

Past stress tests were widely criticized due to computational problems and because many banks received passing marks due to taxpayer bailouts. The European Central Bank has reviewed the quality of bank assets, like mortgages and corporate loans, to determine whether they were accurately valued. The banks that failed the stress test have two weeks to develop a plan to strengthen their balance sheets and nine months to implement it.

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