Bank Stress Tests

A few days ago, the results for bank stress tests of european banks were published. A Bank Stress Test is an analysis carried out in crisis situations to determine wether a bank has enough capital to withstand the impact of these economic scenarios. The tests are used to find and highlight weak spots in the banking system at an early stage so that preventive action can be taken. These tests are carried out by the banks themselves or supervisory authorities as part of their regulation of the business.

Seven out of the 91 European banks that underwent these stress tests have failed them, five of them Spanish (Diada, Espiga, Banca Civica, Unnim and Cajasur). The others were the german Hypo Real Estate and the greek ATEbank.

These failed banks would need a total of 3.5 billion euros of new capital to meet the required standards and now have to agree with their supervisors a plan which will explain how the weakness will be resolved.

These results may seem relatively positive seeing as only a few irrelevant banks failed, but there has been a lot of talk about the severity and the way these tests are done. In the critics opinion, the stress tests are inaccurate as they do not show the depth of the actual debt crisis and are not carried out in a clean way.