Cause and Effect in European Politics and Law

Bargaining for the bank stress tests in the EU until the very last moment

Ralitsa Kovacheva, April 13, 2011

EU Member States have not yet reached an agreement about the capital adequacy requirements to which banks must respond in the European stress tests, the official release of the Hungarian Presidency of the EU stated after the informal meeting of the finance ministers in Gödöllő on 9 April.

The European Banking Authority (EBA) announced it had set the benchmark of Core Tier 1 capital (CT1) at 5% of risk weighted assets. The benchmark is not a legal minimum requirement, it will be used only for the stress testing and “refers to specific criteria which will be applied consistently across all countries participating in the exercise”.

“To ensure a fully harmonised computation by all the banks involved in the exercise”, The European Banking Authority has described in detail the different capital elements of CT1. The commercial instruments included must be “simple, issued directly by the institution itself and able, both immediately and without any doubt, to meet the criteria of permanence, flexibility of payments and loss absorption in going concern situations.”

In the last year's stress testing, besides the use of a broader indicator of capital adequacy, it was allowed to use different national definitions of capital. This was criticised both by analysts and by European officials, because thus the requirements were evaded. “It's very important that we conduct the current round of bank stress tests with all the necessary rigour and we ensure that we have in the member states the needed financial backstops to support restructuring and recapitalisation”, European Commissioner for Economic and Monetary Affairs Commissioner Olli Rehn said, quoted by European Voice.

To ensure full transparency, the stress test will include full disclosure of all capital elements included in CT1 and their evolution since December 2010, under both the baseline and the adverse scenarios,” the EBA announced. Like last year, there is no assumption for a default of a euro area country, which was why the tests were criticised last year. This is understandable from a political standpoint - all EU actions with respect to the troubled countries in the periphery of the eurozone, as well as the long-term solutions to the debt crisis showed that admitting a state bankruptcy is absolutely not an option.

Some media reported that Germany had some objections concerning the CT1 elements, because some instruments used by the German banks and accepted last year, now will not be recognised. About 90 European banks are involved in the exercise, most of which were also tested last year, but there are some new ones. The Spanish banks hold the largest number - 24, many of which are the so called cajas (savings banks).

13 German banks are also on the list (including Deutsche Bank, Commerzbank, Hypo Real Estate Holding, and several Landesbanks), 4 French banks (BNP Paribas, Credit Agricole, BPCE and Societe Generale), 5 Italian banks, 4 from Netherlands, Portugal, Sweden and UK each. 3 Irish Banks (Allied Irish Banks PLC, Bank of Ireland and Irish Life and Permanent) will also be stress tested, although the country has already held its own stress tests which showed that banks needed additional capital amounting to 24 billion euros.

The results of the European stress tests should be announced by the end of June.