Financial Times: EU bank stress tests should be redesigned, says watchdog head

15 November 2018

The outgoing head of the European Banking Authority has questioned the value of its stress tests of lenders’ balance sheets, arguing that elements of them are no longer “tenable” and need a redesign.

The comments by Andrea Enria, who is set to become the eurozone’s top banking regulator, were made two weeks after the latest stress test results, which saw British lenders among the worst performers while Italian banks largely sailed through.

Mr Enria, who the European Central Bank has backed as the new head of its supervisory arm, said the biggest problem was the time-lag between publication of results by the EBA and the revelation of any capital raising that supervisors had forced banks to undertake in response.

This is in contrast to the US, where the two are simultaneous. US stress tests are seen by both markets and the banks to be far more rigorous than those of the EBA.

“The decoupling of stress-test results and supervisory actions and the inconsistency between the transparency of the former and the opaqueness of the latter are, in my view, the main shortcoming of the EU approach compared to the US,” Mr Enria said.

“Regardless of the amount of data we publish, this aspect alone makes the informative value of the results limited and creates uncertainty on future dividend policies.”

There are wider moves to redesign stress tests, which were brought in around the world after the financial crisis. The exercises scrutinise whether banks need to bolster their balance sheets and whether they can withstand further shocks without recourse to taxpayer bailouts. In the US, some of the largest regional banks will no longer have to undergo annual stress tests under new plans by regulators to reduce the industry’s red tape.

Mr Enria said he wanted to start a debate and floated possible changes, including putting a stop to using a snapshot of a bank’s balance sheet at the end of a calendar year rather than taking into account any actions such as capital raising or mergers that a bank might have taken over the 12 months. The Bank of England, which runs its own stress tests, uses such a “dynamic” model, rather than the current “static” one used by the EBA.

Alternatively, he said the EBA could adopt an approach more akin to that in the US. Under that model, it would be for regulators across the bloc to publish fewer data points but they would also have to publish each bespoke action individual banks have to take under so-called Pillar 2 requirements.

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