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The European Banking Authority (EBA) plans second round of bank stress tests - looks to US for advice

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The European Banking Authority (EBA) has agreed on a strategic plan for a second European Union (EU)-wide stress test to assess the resilience of Europe's banking sector.

 

The tests, which aim to analyze the ability of banks to react to hypothetical stressed situations, are expected to be conducted in the first quarter of 2011. The results will be published in June or July. The tests will be carried out in cooperation with the national supervisory authorities, the European Systemic Risk Board, the European Central Bank and the European Commission. They will run parallel to stress tests undertaken by the European Insurance and Occupational Pensions Authority as part of the framework designed by the European System of Financial Supervision. According to EBA, the methodology and approach taken in this year's test will build on that used in the 2010 stress test. Last year's EU stress tests were criticized for not being stringent enough because lenders in the 27-nation region were shown by regulators to need only $4.6bn of new capital, about a 10th of the lowest analyst estimate.

Europe is taking advice from the U.S. on how to improve its bank stress tests, officials said Tuesday, as the region tries to shore up its defenses against the debt crisis that has crippled the euro currency zone over the past year. The talks are part of an overhaul of the EU's crisis management strategy to prevent more expensive bailouts and avoid losing years of economic growth. Uncertainty over the well-being of Europe's banks has been central to the debt crisis. Expensive bank bailouts have stretched some states' budgets to breaking point, while governments' high debt loads have raised concern over the quality of their bonds, in turn held as capital buffers by big financial institutions. Europe has to organize "better" and more transparent stress tests than those conducted last summer, said Belgian Finance Minister Didier Reynders. The results published last July came under a huge amount of criticism for giving the all-clear to a number of banks that have since been shown to need help, notably in Ireland. Many analysts dismissed them as nothing more than a whitewash.

"We need to organize the same kind of stress tests on both sides of the Atlantic Sea because if we don't have the same kind of stress tests as the U.S. and in Europe, we will have many criticisms of them,"

Reynders said on the sidelines of the meeting of the EU's 27 finance ministers.

European policymakers are putting great stock in the revamped stress tests, as part of a comprehensive reform package, which is likely to also include boosting the size and powers of the region's euro750 billion ($1 trillion) bailout fund. The hope is that the new strategy will help tame the market turmoil that has pushed Greece and Ireland into seeking international financial help. Michel Barnier, the EU's internal markets commissioner, said he's been discussing with U.S. regulators to learn how they conducted their stress tests. While the European tests met a lukewarm response in the markets, the U.S. tests of 2009 were widely credited with helping to ease the financial crisis in the world's largest economy and limiting the length and depth of the recession. Ten of the 19 U.S. banks that were tested failed and were forced to raise nearly $75 billion to shore up their finances. In contrast, only seven of 91 European banks tested failed and were required to raise a paltry euro3.5 billion. Barnier said he hoped the parameters of the new stress tests will be agreed by the end of March for a July assessment. A key point of debate is how the banks' liquidity position will be assessed, a measurement that was notably absent during the last round of tests. Last year's tests focused on banks' capital buffers — that is, how much money they have set aside — but analysts say banks' liquidity — or how quickly they can access that money under stress — needs to be scrutinized as well. German Finance Minister Wolfgang Schaeuble said he wanted more banks to be assessed than last time, adding that he also backed an assessment of their liquidity position. However, he was reluctant to commit to the full publication of all the results, saying too much disclosure might rattle markets. Last year's tests were published in a febrile environment after the markets closed on a Friday, with each national regulator deciding on what they would reveal, leading to huge uncertainties among investors.

"We have to avoid what happened last year," Schaeuble said.

Barnier agreed that the tests should be as broad as possible, with at least 85 banks assessed, but denied that Europe would just copy the U.S. template for the tests, and stressed that it's a "two-way street."

"I am very committed to this idea of trans-Atlantic good intelligence when it comes to supervision," said Barnier. "We will be coordinating as well as we possibly can, given of course the structure, the special nature of the banking sector on each side of the Atlantic."

The commissioner also called on banks to act more responsibly and morally as the annual bonus season kicks off. The EU decided at the end of 2010, after the financial rescue of Ireland, that it would have to do another round of stress tests. The main reason Ireland had to be bailed out to the tune of euro67.5 billion in November was that its public finances were saddled with banks' massive losses. The same banks got the all-clear last July from the little-known European regulator, the Committee of European Banking Supervisors. The committee has since been replaced by the new European Banking Authority, which is currently working on the methodology of new tests, due to be published in mid-2011.

More about the new EBA: http://www.asymptotix.eu/content/european-banking-authority-and-running-and-preparing-new-eu-wide-stress-test

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