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Oct 27 2014, 7.55am GMT


Further action is needed by banks to address the 879 billion euro exposure to non-performing loans. 

However, the results from the ECB stress test were not unexpected and many of the banks have already taken action to cover their capital shortfall.

Forex reaction:

EUR/USD rose to 1.2691 +0.0022 (+0.17%) at 07:28 GMT

GBP/USD up to 1.6097 +0.0014 (+0.09%) at 07:30 GMT

Key results of comprehensive assessment of 130 largest euro area banks:

Source: ECB

  • Capital shortfall of €25 billion detected at 25 participant banks
  • Banks’ asset values need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall
  • Shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks
  • Additional €136 billion found in non-performing exposures
  • Adverse stress scenario would deplete banks’ capital by €263 billion, reducing median CET1 ratio by 4 percentage points from 12.4% to 8.3%
  • Banks with shortfalls must prepare capital plans within two weeks of the announcement of the results. The banks will have up to nine months to cover the capital shortfall
  • Italy, Cyprus and Greece have largest problems but banks' capital leaks have been addressed with a remainder of 10 billion euros to be raised

The ECB delivered the results with an upbeat release from Vítor Constâncio, Vice-President of the ECB, saying,

“This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

What happens after the disclosure of the results?

Within two weeks of the results being disclosed, banks have to submit capital plans detailing how shortfalls will be covered. The shortfalls identified in the Asset Quality Review or under the baseline stress test scenario have to be covered by the end of April 2015; those identified under the adverse stress test scenario by the end of July 2015.

The results will be taken into account in day-to-day supervision by the ECB from November onwards. In particular, results will be factored into the ongoing assessment of banks' risks, their governance arrangements and their capital and liquidity situation as part of the Supervisory Review and Evaluation Process (SREP).

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