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The Deutsche Bank towers in Frankfurt, seen through artist Max Bill's statue Continuity - - Durch die Statue 'Kontinuität' von Max Bill
The European Banking Authority
(EBA) said on Wednesday that the current stress tests of EU banks will be
tougher than last year's sham and termed criticism as being based on
"a few points out of context."
"It is a fact that the
scenario of the 2011 EU-wide stress test is tough, and more severe than last
year," EBA chairman, Andrea Enria, said in a statement
"You need to look at the whole package of what is in the new stress tests,
not just pick on a few points out of context," Enria added.
The new-pan European supervisory
authority said that the standards and scenarios to be used in the stress tests
on 88 of the Europe's biggest banks are sufficient to determine if any banks
will be forced to raise more capital.
Last year, within months of passing
the tests, Bank of Ireland and Allied Irish Banks were deemed to have
Critics have focused on the fact
that regulators in individual countries will have discretion over parts of the
tests, such as the definition of an important capital ratio known as Tier 1. The
Wall Street Journal reported Tuesday that the EBA has told regulators they can
use a local standard of the Tier 1 capital ratio, just as individual countries
did in last year's stress tests.
Crucially, some of the scenarios
under "adverse" macroeconomic conditions are seen as mild. In the case of
Ireland, the tests see Ireland's economy contracting by about 1.6% this year,
followed by 0.3% growth in 2012 under a worst-case scenario.
Reuters reports that an outline of
the tests it has seen requires that banks be tested for their resilience in the
face of a four percentage points dip over two years from forecast economic
growth, compared with three percentage points in the 2010 test.
The economic outlook this year is improved compared with last year and the EBA
said there will be tougher assumptions to prevent banks from getting around the
stress test by shifting assets around their balance sheets.
The Wall Street Journal says
Germany's 8 public sector Landesbanks lobbied for exclusion of their banking
books, which hold much of their sovereign-debt exposure. They argue that the
stress tests shouldn't apply to their banking books because banks hold
securities there that they intend to keep until they mature, in contrast to
their trading books, which hold debt banks intend to sell.
“We should never have let them go,” Roger Nightingale, strategist at Pointon York, told CNBC on the state rescue of Lloyds and RBS. “We should not buy up failing banks, it’s obvious it was a mistake.”