European Banking Authority, famously known as EBA is known for conducting performance and stress tests on banks of the EU every year. With its head quarters at London, this authority is specialized in assessing the performance of the banks through tests and ratings and the notifications given by this authority has reliability when compared to any other association in the EU. Stress tests conducted on banks revealed some shocking results as almost 1/6th of the banks failed (25 banks out of a total of 130) in the recent test conducted by the EBA and all these results are compiled based on the performance of the European Union banks till the end of last year (2013).
Banks Participated and Test Parameters
Almost all the banks from the European Union agreed for this test and the prestigious banks like HSBC, RBS, Lloyds etc were also participated and almost all the reputed banks passed the test. The tier one common equity ratio score must be greater than 5.5 to successfully pass the test and the balance sheet of the banks play a vital role to achieve this score. The higher the score, the ability to absorb the market shocks is more and vice versa.
Performance of UK banks
The recent Scotland crisis has no effect on the banking sector of the United Kingdom. All the banks from the United Kingdom passed the stress test of EBA which is a positive sign for the banking sector of UK. Many financial experts expected that this year at least one or two banks from UK will fail in test and raised the concerns. So all the customers of UK banks can feel safe and secure for the one next year. These results even help in reviving the UK economy which got slowed down after subprime crisis. One more important news for UK banks is they not only passed the stress test conducted by EBA but also the England PRA methodology test. 26th September is a really good day for UK banks as all the banks passed these two tests.
Banks Which Failed in the Stress Test
In the recent stress test conducted by EBA, more than 25 banks failed to meet the minimum required criteria which are out of these 11 banks took steps to correct the situation and raised some funds and going through the recovery phase whereas the remaining banks are yet to start the recovery steps and they are in immediate need to raise funds. Italy is facing a tough situation as four banks from that country are facing situations in the report where as two banks from Belgium, Greece and Slovenia are performed below the standards. Only one bank underperformed from Austria, Cyprus, Republic of Ireland and Portugal. One can search in Google or go through the report which was recently released by EBA to get the list of those 14 banks and you can go through the detailed review of each and every bank of EU once you got that report.
How Much Money is required to Revive Banks?
As per the financial experts estimates all the 25 banks need investments worth 25 billion Euros as the investment capital to get into the success track. Before the release of this report some experts advocated a need of capital inflow of 30 to 50 billion Euros to the banking sector of EU and the real situation is well under control as the requirement is well below what the experts projected. This amount can come from the private investors or through the packages given by the government. Otherwise there are changes that these banks may collapse. The pressure on these banks got doubled as all these banks were already in a bad condition. It is not an easy task to get the revival but banks must take all the required steps so that they can sustain.
Vitor Constancio’s Report
Vitor Constancio is the vice president of EBA as of now and he analysed this report in a positive way. He remarked that this report once again proves the credibility of the largest banks of the European Union and it is a positive symbol to attract the investors. This will also help in building the confidence of the public which was low because of over enthusiastic financial experts review. However he didn’t mentioned any ways to get that capital. For record, one of the oldest banks Monte dei Paschi from Italy is facing the highest shortfall of all the banks.
Banks Present Condition in Italy
Several banks lost their share value by more than 10% after the report became public. Some banks even suspending from trading as they lost more than 17% value in a single day. Frankly, this stress test report from EBA created ripples in the Italian banking industry and it added an extra burden to the already worst positioned Italian banks. This will surely reduce the confidence of investors and those who wanted to invest in Italy may look for alternative countries because of this report. Famous market traders of Italy stopped trading of these bank shares for some time and this itself shows the worst situation of banks in Italy.
Banks Which Passed the Test with Slight Margins:
Several experts expected that the famous bank of the European Union Lloyds may fail the test and it will be devastating for the European Union banking sector. Fortunately this bank passed the test with slightest margins and as per the company welcomed it. The capital base ratio of Lloyds is 6.5 in the worst scenario and the position of the other three big banks of EU is no different from Lloyds. Except HSBC, remaining three released the press statements about passing the EBA stress test. As per the report of the Lloyds, this position is because of strong steps taken by the management from the last three years and the results are showing up now. The capital base ratio for RBS is 6.7 in the worst conditions and it is close to 7 in case of Barclays where as HSBC is somewhat better in this test with a score of 8.6 even in its adverse conditions. So all these banks passed the EBA stress test and gave new confidence to the investors of UK. But the shares of these banks are still falling despite the positive news for them and they will recover soon.
Several banks were eagerly waiting for this results long back until the EBA release the results on 26th October 2014. This results gave a positive impetus to some countries where as it remained as a Black Sunday in other countries. United Kingdom banking sector got positive vibes where as the banking sector Italy totally collapsed. The main reason for the recent financial crisis in Europe is because of losing credibility of banks. This result partially helped in resolving the crisis as most of the noted banks passed the test.
Reliability of EBA Methods
The discussion on the reliability of European Bankers Association started in 2011 itself as so many financial experts criticized EBA for its pro UK methodologies. EBA is clear about its methodologies and recently released a video explained the procedure adopted by it. If you go through this video once, you can get a fair idea EBA’s policies as the video explained all the things with nice explanations including figures and findings. Frankly there is no other reliable bank performance indicator other than EBA as far as the European region is concerned.
Next Round of Tests:
EBA announced a new series of tests for the European Union banks once again. The present results came with the banks performance till the end of 2013. The new tests will be conducted on the more recent results and the association is yet to clarify about the type of tests. It may choose the stress test once again or opt for other performance tests like NPA (Non Performing Assets) test, asset liability test etc. Wherever the test series may be EBA is always keeping an eye on the performance of the banks and giving them a chance to prove which is good to see. This next round of tests will start soon though official announcement is yet to be made.
What Banks Should Do Now?
Getting a score of 11-12 is considered very safe and all banks must try to achieve this score. This represents the banks stable position despite the shocks given by market due to wars, oil crisis, import export imbalance or any other reason. As the EBA announced next series of tests, this is a crucial time for banks to improve themselves so that they can become a part in resolving the EU financial crisis. Financial and Banking experts are still analysing the situation and coming up new theories and ideas but it is the banks that have to decide. Follow the expert advice and try to score better so that the investments and career opportunities in banks can increase in the near future.