Europe keeps worrying investors. Now it’s about the EU’s banking system. The results of the stress tests conducted by the Euro Banking Authority (EBA) are not so reassuring: 8 banks were financially unstable while 16 other banks almost collapsed.
Last year’s stress tests failed to anticipate the forthcoming Irish crisis. This time they included a prolonged recession, as well as stock and housing market collapse, in the scenario of economic catastrophes.
1. All in all they tested 90 EU banks, which make up 65% of the EU’s bank assets. Once again, 8 of them failed, 1 bank refused to participate, 16 other banks showed poor results.
2. Who failed? 5 Spanish banks (UNNIM, CAM, Catalunya Caixa, Banco Pastor and Caja 3), 2 Greek banks (ATEbank and Eurobank EFG) and one Austrian bank - Oesterreichische Volksbanken. Helaba (Germany) refused to participate in the stress tests, so it failed as well.
3. Among the 16 banks that hardly are the tests include 8 Spanish, 2 German, 2 Greek, 2 Portuguese banks and 3 more banks from Italy, Slovenia and Cyprus.
No sensation: can investors calm down?
In fact, those who initiated these tests assume that such challenges can deteriorate the tense situation in the financial markets:
· Everyone was ready for something like this. In advance of the stress tests some experts anticipated that 5 to 15 banks would fail. Previously Goldman Sachs also forecast that around a dozen of EU banks would fail to pass the tests. Reuters’s experts went as far as to predict that every 6th bank wouldn’t make it.
· Last year’s results. In 2010 only 7 out of 91 banks failed.
Who conducts these tests and why?
The banks are challenged on an annual basis. But this time they chose the wrong moment to reveal the results. Analysts warn that the EU’s financial system may be harmed by excessive stress tests:
1. The USA was the first to start challenging its banks. Shortly after that Europe borrowed this useful initiative.
2. In the EU stress tests are conducted by the European Banking Authority (EBA).
3. The banks are tested along with all their affiliates. In order to pass a test a certain financial institution’s core capital must correspond to the Tier 1 capital requirement even under weak economic activity (Core Tier 1 = not less than 5% of the assets). For the eurozone’s banks that pass the tests it means that they will be able to cover their losses for their own accounts in case there is an emergency like a decline in the GDP or a stock / housing market collapse.
4. The main purpose of such tests is to find weak and unreliable banks which may not survive the worsening of the region’s economic situation.
5. Those banks and financial organizations that failed such a test should eliminate their weak spots as soon as possible. According to the latest tests, the net shortage of capital in the banks that failed the tests is 2.5 billion euro. It means that in the coming months they will have to attract those funds.
6. Most EU officials are sure that such tests will eventually help to overcome the eurozone’s crisis phenomena. Some US officials share their opinion.
What are the possible consequences of stress tests?
The positive sides:
· To some extent stress tests can eliminate market uncertainty and help investors clarify the possible risks in a country’s banking system.
· The regulators can find out how much money the weak banks will need in case of a crisis.
· Stress tests can simulate some processes that can potentially threaten a country’s banking sector, which will allow the regulators to develop an adequate strategy of reacting to possible threats.
The negative sides:
· It becomes difficult for those financial institutions that fail such tests to attract funds because the investors and clients of such a bank will obviously lose confidence in it.
· The investors may start panicking that the results of stress tests are underestimated.
EURUSD perspectives:
According to the Department of studying Masterforex-V trading system , EURUSD is forming a downward retracement.The retracement will be over as soon as the price breaks above the MF pivot and sloping channel (as shown below). If it happens EURUSD will continue the long-term rally in the form of wave c(C ) of Weekly aimed at updating the high at 1.4925.
Market Leader and Masterforex-V Academy would be very grateful to you for participating in a survey. Please, visit the Academy’s forum and answer the question given below:
What is your opinion about stress tests?
· They provide investors with valuable info
· They only confuse investors
· They are of no help to investors
· Your own opinion
