articles | 17 September 2014

Deliberations over bank stress tests to start shortly

Deliberations between the European Central Bank (ECB), Central Bank of Cyprus (CBC) and local commercial banks as part of finalising the results of the ‘stress test’ will commence shortly, the Cyprus News Agency (CNA) reported recently.

The test is a simulation exercise aimed at establishing the Eurozone banking system’s capacity to absorb and survive economic shocks and will place all systemic banks in the region – 124 in total – under the microscope to identify any additional capital requirements by the end of October.

The plan is to publish the test’s results by the end of October, ahead of the scheduled implementation of the Single Supervisory Mechanism – which would transfer supervision authority for the Eurozone’s 6.400 banking institutions from national central banks to the ECB – on November 4.

Minimum capital requirements for participating banks have been set at 8% for the test’s baseline scenario, and 5.5% for the adverse scenario.

A Eurozone-wide Asset Quality Review (AQR) has already been concluded and the ECB is in the process of incorporating the results with the stress test, conducted in collaboration with the European Banking Authority – a process termed ‘join up.’

The join up is expected to finalise capital-raising requirements for individual banks – Cypriot participating banks are the Bank of Cyprus, Hellenic Bank, the Co-operative Central Bank and Russian Commercial Bank.

An unnamed source cited by the CNA said a dialogue will commence next week between the ECB, CBC and local participating banks, lasting until the end of October, at which point the test’s results will be published.

While the dialogue was described by said source as aiming to “settle certain pending issues,” a recent Wall Street Journal story had Eurozone officials saying that over the coming weeks ECB officials would be sharing preliminary stress test results with commercial banks, thus giving them a chance to cover any capital shortfalls or spot any inaccurate calculations ahead of publication of the test results.

Once the test results are announced by the ECB, Eurozone banks found in need of additional capital will be required to submit a viable capital-raising plan within 15 days.

Baseline scenario shortfalls must be covered within six months while nine months are given to banks to plug gaps found under the adverse scenario.

Source: Cyprus Mail

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