On Sunday October 26, the results of the recently conducted stress tests were published.
The European Central Bank (ECB) tested 130 Eurozone banks, 25 of which failed the test. The European Banking Authority (EBA) had a look at 123 banks EU-wide, with 24 institutes failing its test. As some commentators suggested, the test was just tough enough to appear credible, yet not so harsh as to furnish grounds for new doubts, which would, indeed be contrary to one of its primary objectives, namely to “assure all stakeholders that banks are fundamentally sound and trustworthy”.
Nearly 20% of the banks tested failed. Will they go belly up? Not yet. In the next two weeks they have to submit capital plans, in which they explain in detail how they envisage to cover the shortfalls. After that the banks will have 6 months to take care of shortfalls identified in the Asset Quality Review or under the baseline stress test scenario, and 9 months to tackle shortfalls identified under the adverse stress test scenario.
It is important to remember that these tests are nothing but a simulation. In fact, many question their design, as it did not include the (truly worst-case) scenario of deflation or massive losses incurred as a result of litigation.
The results will likely not affect the consumer, at least not from day one. They could, however, open the banks’s eyes to their weak spots: more than anything else, the results serve as independent evaluation of how robust or frail their standing is which could eventually prompt them to be more careful.
Finally, the retail investors themselves will probably have hard time interpreting the results or seeing any tangible benefits resulting from them.