ECB to Signal Toughening of Stress Tests for Banks

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The European Central Bank (ECB) has informed banks that passed the first round of stress tests this year that their final results may not be as optimistic as initially expected, according to Bloomberg.

Banks that would benefit from an interest rate hike now need to prepare for adjustments in order to receive more accurate results. However, some banks disagree with this, believing that the ECB is striving for worse outcomes in order to put pressure on the entire banking industry.

The assessment obtained from the stress test is a crucial examination for banks, as it demonstrates their readiness for shocks in the banking industry and sets capital requirements. Furthermore, it bolsters arguments in favor of distributing billions of euros in shareholder payouts.

The European Banking Authority develops the rules for the stress test, which is expected to be completed by the end of July.

Following this news, the Euro Stoxx Banks Index dropped, as investors now fear the possible application of the strictest economic scenario to date. This comes despite the financial reports of banks receiving support on the back of profit growth last year, due to rising rates in the region and low provisions for non-performing loans. Consequently, confidence grows that such a stress test will not significantly reflect a deterioration in banks’ starting positions.

Banks are tested based on two scenarios: an unfavorable one and a more favorable base scenario spanning three years until 2025. Higher results indicate the real steps banks have taken to achieve greater stability.