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In this test, the questions asked are as noteworthy as the answers received. In the months since the announcement that national and pan-European authorities would “stress test” 91 of the region’s banks, few details about the methodology used in the exercise were disclosed. Thus, when the results of the stress test were released on July 23rd, the assumptions used to gauge the health of banks were analysed as closely as the ultimate marks (pass or fail) assigned to each lender.
In the end, seven of the 91 banks failed the test. In aggregate, the “failed” banks would be left with a capital shortfall of €3.5bn under the test’s “plausible but extreme” worst-case scenario, according to the Committee of European Banking Supervisors (CEBS), the test’s co-ordinating body.
The number of banks that failed the test, and the aggregate shortfall in capital, is lower than expected, and this could be perceived initially as an overly rosy assessment of the health of Europe’s banking sector.
Read more at Financial Services Briefing: “Testing times” (July 23rd)