Brief

EU-wide stress test brings us closer to a banking union

EU-wide stress test brings us closer to a banking union

Summary The European banks have just been through a comprehensive stress test. The test is an important step in tying up loose ends after the financial crisis and thus a cornerstone in the establishment of a banking union. The stress test included 130 banks, 25 of which did not pass the test. However, compared to the stress test from 2011, the general health of the European banking sector has improved.
 
The preventive effect of the stress test should not be underestimated. The banks concerned have, since the announcement of the stress test raised more than 200 billion euro in supplementary capital. The 30 largest banks have raised 60 billion euro alone, which means that the stress test in and of itself has played an important role in creating a healthier financial sector.
 
In the debate on the banking union, opponents of the union have raised claims that the Northern European countries risk paying for Southern Europe’s problems. Because of this, it is crucial to reinforce that the idea behind the stress test is to do a comprehensive clean up, and this clean up includes banks in core countries such as Germany, Belgium and France. The Danish banks did well in the stress test, but many have had to make additional write-offs in response to its thorough conductions.
 
Confidence in the banking system is vital in putting Europe back on track and facilitating economic growth. A key difference between the USA and Europe is that there was a quick clean up in the financial sector in the USA, which has made the situation better for private investments. A comprehensive stress test of 80 percent of the total credit market is an important part of that same process in Europe. Increased confidence should boost the lending markets.

Main conclusion
  • The stress test was the primary spring-cleaning task; now the ECB has to work on everyday maintenance.
  • 130 banks were investigated and subjected to a tough test. The thoroughness of the test will boost confidence.
  • 25 banks did not pass the test at their first attempt, but in reality, only eight banks have gone hunting for capital.
  • A cleanup of the financial sector is crucial for boosting confidence. The stress test is therefore a cornerstone in stimulating economic growth and increased lending.
  • The stress test indicates that the national supervising units have not been sufficient.
  • Southern European banks are not the only ones in need of a cleanup. The list of failed banks include German, Belgian and French banks. Danish banks have also had to make write-offs following the completion of the test.
  • The stress test is vital in establishing the banking union. The survey of the inner workings of the banks therefore eliminates uncertainties about entering into a common insurance policy. It strengthens the banks and the opportunities for economic growth.
  • Rising stock prices in the first few hours after the results of the stress test were published show that investors have welcomed the test. However, the true litmus test will be whether the banks included in the test will suddenly show signs of trouble.
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