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European Banks Can't Fail

EBA rolls out post-crisis stress test, but does not intend to increase capital requirements for the most part.

By Silla Brush and John Glover, Bloomberg | Updated on February 25, 2016

Europe’s biggest banks face a stress test this year that will gauge their capacity to withstand economic contraction at home, shocks in major emerging markets, and declines in property markets and commodities. None of them will pass—or fail.

The test has no pass mark to identify capital shortfalls, a break from previous practice, because banks have emerged from the financial crisis, the European Banking Authority (EBA) said. Supervisors such as the European Central Bank (ECB) and the Bank of England (BOE) will factor the results into their annual assessments of lenders. Both have said the industry is well capitalized and they won’t be imposing significant new capital requirements.

"We have seen investor concern about lenders' high level of debt, exposure to the oil and gas sector with falling commodity prices, and the slowdown in growth in China." --Edward Chan, Linklaters LLPThe adverse scenario for this year’s health check, published on Wednesday by the London-based EBA, exposes banks to recessions in the European Union this year and next followed by anemic growth in 2018. It assumes gross domestic product rising 3.4 percent in China this year, compared with a baseline projection of 6.5 percent. In Russia and Brazil, 2016 GDP plunges 8.1 percent and 5.9 percent, respectively.

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