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Falling Short of Expectations?
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Falling Short of Expectations?

Stress-Testing the European Banking System

Viral V. Acharya and Sascha Steffen
CEPS, 2014
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8

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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.

Take-Aways

  • In 2014, the European Central Bank (ECB) is conducting an asset quality review of major European banks to determine their capital adequacy under stress scenarios.
  • Analysis of publicly available data reveals that, in an unstressed environment, major European banks show a total capital shortfall of between €7.5 billion and €66.8 billion, based on book capital metrics.
  • These same banks currently have a combined “stressed capital shortfall” of between €82 billion and €176 billion, using a 4% capital ratio as a benchmark. When calculating for a 7% capital ratio, a shortfall of between €509 billion and €767 billion results.

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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