The European Union bank regulator said Friday that this year's stress tests on banks will be harsher than last year's due to lower growth assumptions.
The test, whose results will be published in June, assumes EU economic output will shrink 0.4 percent in 2011 and will show no growth in 2012 — a 4 percentage point difference from current forecasts, the European Banking Authority said. That compares with a 3 percentage point drop assumed in the 2010 stress tests.
One crucial element still missing from Friday's scenarios is the bar that banks would have to jump to pass the tests — namely the minimum capital ratio they have to maintain despite the shocks. The so-called core Tier-1 capital ratio currently varies from country to country and the EBA said it was still in the process of defining the one to be used for the tests.
The EBA has come under fire for not setting stricter shock scenarios for banks, with critics saying a partial default of a highly indebted country like Greece cannot be ruled out. However, banks will have to disclose all relevant exposure to sovereign bonds — including those of non-EU countries like the U.S. and Japan — which would allow analysts to run their own calculations.
The bank stress tests are seen as a central part of Europe's efforts to find its way out of a debt crisis that has already forced Greece and Ireland into international bailouts. Huge problems in Irish banks were the main reason that Ireland had to seek international help.
Analysts are also concerned about the health of banks in stronger countries like Germany and France, which have huge exposures to Europe's troubled economies.
EU stress tests conducted last year were widely seen as a whitewash when only seven of 91 tested banks failed, and two Irish banks that passed the tests had to be rescued soon after.
The EBA didn't immediately say how many banks would be tested this year, although recently leaked documents set the number at 88. On Friday, the EBA only said that the banks to be tested represented more than 65 percent of EU banking assets.
This year's scenario is based on three elements set out with the help of the European Central Bank, the EBA said: A set of shocks within the EU mostly related to the debt crisis, a negative demand shock caused by problems in the United States, and a drop in the value of the dollar.
These developments would trigger increased unemployment and a decline in house prices, which would both hurt banks' chances of getting loans repaid.
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