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European regulators to test banks' strength against financial shocks 

February 25, 2016

Sean Farrell, The Guardian

European regulators will test banks’ financial strength against two years of economic contraction, falling commodity and property prices and further regulatory fines as fears mount over lenders’ ability to withstand shocks.

The European Banking Authority said on Wednesday its annual stress test programme – which covers UK banks Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – would assess banks’ resilience when faced with a slowing global economy.

The main risk categories the EBA will test are: falling prices of assets such as commodities and property, weak profits for banks, risk of debt default by countries and companies, and strains in money market funds and other parts of the financial system outside the banking sector.

Specific risks within those categories include potential fines for misconduct, an unexpectedly sharp slowdown in China and other emerging markets, sovereign debt default and deflation. Under the EBA’s “adverse scenario”, the European Union’s economy would contract 1.2% this year and 1.3% next year before expanding by 0.7% in 2018.

The tests cover 51 banks making up 70% of Europe’s banking system: 37 in the eurozone and 14 outside the single currency bloc. The EBA said that, unlike in previous years, its tests would not pass or fail banks and no capital thresholds had been set. The EBA said in general it believed banks had enough loss-absorbing capital to withstand potential shocks.

The EBA said: “The objective of the crisis stress testing was to identify possible capital shortfalls and require immediate recapitalisation actions. As banks have now moved to a more steady-state setting, the aim of the 2016 exercise is rather to assess remaining vulnerabilities and understand the impact of hypothetical adverse market dynamics on banks.” Read more

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