The European Banking Federation (EBF) welcomes the coordinated approach to the European stress tests of banks, under the authority of the European Banking Authority, in cooperation with national supervisors, the European Central Bank, the European Systemic Risk Board and the European Commission, which allows for an EU-wide assessment. The harmonisation of methodologies and assumptions ensures the stressed scenarios are applied consistently across all the banks in the exercise.

“Stress tests can of course contribute to restoring confidence in the banking sector”, declared Guido Ravoet, Chief Executive of the EBF, “but it must be made clear that they rely on extreme scenarios, which largely exceed reality and go far beyond the requirements made by Basel III or even by current minimal legal requirements. In the meantime, the European Central Bank itself forecasts a euro area growth at between 1.3 and 2.1 per cent for 2011, and between 0.8 and 2.8 per cent for 2012.”

“Clearly, stress tests are not an impact study but a simulation of a fictitious severe downturn situation”, added Ravoet. “And they are, above all, one of a number of tools used in the comprehensive supervision of banks.”

The EBF points out that the banking sector has substantially recapitalised itself after the crisis and will continue doing so in the forthcoming years, following the policy initiatives to enhance the resilience of the banking sector as agreed by international standard setters and endorsed by the G20 Leaders. It also stresses that this new exercise is stricter than the one carried out in 2010, as it applies a worst-case adverse scenario including a 4 per cent fall in GDP from the baseline scenario (as compared to a 3 per cent fall in the 2010 exercise).

It is worth noting that in parallel to the European exercise, the US authorities have recently carried out a Comprehensive Capital Analysis and Review (CCAR) on their 19 largest financial institutions as “forward-looking economic assessments”, to determine whether they have enough capital to withstand another two years of the current economy. In the future, the EBF would like a similar capital adequacy approach to be implemented to EU banks, namely a “Pillar II” approach, tailored to individual institutions, with only a summary of results made public.

Press release