By Max Clarke
‘Stress tests’ carried on 90 EU banking institutions across 21 EU member states have revealed that 21 fell below the recommended 5% ‘Core Tier 1 Ratio’.
A further 16 banks displayed a ratio of between 5-6%, cumulatively representing a €26.8 bn shortfall in capital required for resilient banking.
Weaknesses exposed by the European Banking Authority (EBA) stress tests have not been unexpected, and have been welcomed as a key driver towards international banking transparency.
On the basis of these results, the EBA has also issued its first formal recommendation stating that national supervisory authorities should require banks whose CT1R falls below the 5% threshold to promptly remedy their capital shortfall. The EBA notes that this is not sufficient to address all potential vulnerabilities at this point.
Therefore, the EBA has also recommended that national supervisory authorities request all banks whose CT1R is above but close to 5%, and which have sizeable exposures to sovereigns under stress, to take specific steps to strengthen their capital position. These would include, where necessary, restrictions on dividends, deleveraging, issuance of fresh capital or conversion of lower-quality instruments into Core Tier 1 capital.
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