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Falling Short of Expectations?

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Falling Short of Expectations?

Stress-Testing the European Banking System

CEPS,

5 min read
5 take-aways
Audio & text

What's inside?

It is best not to be too relaxed about upcoming European bank stress tests.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

In 2009, the Federal Reserve conducted stress tests on US banks, which helped restore confidence in the banking system in the wake of the financial crisis. Subsequent stress tests in Europe have been decidedly less reassuring. In 2010, authorities declared Ireland’s banks sound shortly before they received bailouts, and, just three months after passing a 2011 stress test with flying colors, Dexia imploded, requiring a massive bailout from France and Belgium. The 2014 stress tests, the first since 2011, will be an opportunity for the European Central Bank to gain some credibility. getAbstract considers this statistics-laden but thought-provoking analysis of the major European banks’ capital positions a helpful aid in assessing results of the upcoming tests.

Summary

In 2014, the European Central Bank (ECB), in preparation for its new role as supervisor of Europe’s largest banks, is conducting an asset quality review (AQR) of those banks as part of a renewed effort to stabilize and restore confidence in the European financial system. A credible AQR is critical for achieving this goal, and yet national policy makers and regulators may attempt to protect the reputations of their own banks by influencing the ECB’s methodology. Researchers analyzed 109 of the 124 banks that will undergo this review to conduct an independent evaluation...

About the Authors

Viral V. Acharya is an economics professor at New York University’s Stern School of Business. Sascha Steffen is an associate professor at the European School of Management and Technology.

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