European Banks preparing for the stress tests
The latest comments of Ms Nouy, the Single Supervisory Mechanism Chair, picture a new scenario for European banks. The new pan-European regulator certainly wants to establish an high degree of credibility and is sending a clear message to the banks: act now or fail.
Overall the new stress tests will strengthen the banking sector that faces several challenges.
One of these challenges is the intimate link between banks and sovereign bonds that the SSM is trying to break.
Several European banks still rely on the profitable carry trade that lead to an increase of EU Government-debt holding to 4.3% of last December from a 3.5% of June 2012.
Said increase underlines how the ECB financing is not always used to lend and relaunch the economy. The upcoming stress tests will apparently use leverage ratio as a “crucial measure” that creates some disparity with the way U.S. banks are assessed.
Some failures are to be expected and can be positive to reinforce the European banking sector but several unpredicted failures might create a sense of insecurity to both investors and the public.
It seems that banks that have recently received state aid would have to pass a more simplified stress test based a on profit and loss statement set in the restructuring plan.
National regulators should conduct their own reviews and provide with clear alternatives to these banks that might not pass the stress tests and are in need of capital.
Lending and Growth
It is clearly very challenging for several European companies to remain competitive in a climate of higher fiscal pressure and limited lending opportunities. The ECBE should think about ways to solve the transmission mechanism weaknesses and ensure both the good health of the European banking sector and access to credit (particularly relevant for SMEs).
National Governments should also ensure that the current austerity measures are combined with incentives for companies to hire and therefore reduce unemployment.
Over the medium and longer term this is one of the main European challenges: maintain and increase competitiveness during the recovery process.
– SSM is determined to conduct reliable and credible stress tests but National Regulators should ensure that ill-capitalised banks act now
– The Transmission mechanism might not provide sufficient lending to European small and mid size companies and therefore needs to be improved.
– European countries facing austerity measures should be concerned about maintaining and increasing their competitiveness.