This year’s European Banking Authority (EBA) stress test results are set to be released on July 29, which should be an important date in the calendar for financial analysts across Europe and the US.
However, as Bank of America writes in a research report issued to clients at the end of last week, this year’s stress test from the EBA was never designed to be challenging and could be somewhat of a non-event.
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Indeed, the 2016 EBA stress test does not include the “pass/fail†conclusion of prior tests. Nor is it widely assumed that banks will have to raise equity as a result of a poor grade. According to the EBA:
“The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for SREP in 2016. The results will thus allow competent authorities to assess banks’ ability to meet applicable minimum and additional own funds requirements under stressed scenarios … [and] provide solid ground for discussions with individual banks to better understand (i) relevant mitigating management actions and (ii) how a bank’s capital position may be affected by the adverse economic conditions.
No pass/fail threshold has been included as the objective is to use the stress test as a supervisory tool, whose results will be discussed with individual banks in the SREP process, where mitigating actions may also be considered.â€
Stress tests could lead to fireworksÂ
Having said all of the above, the EBA’s stress test results will be released into a jittery market on June 29. Large drawdowns in capital as a result of the tests may prove to be headline grabbing for some of the main banks and what many have been considering to be a non-event may have significant repercussions for many European banks.
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