The aim of the new stress tests for the European banking sector is to show whether the main European banks have more than enough capital to withstand an adverse economic and financial scenario over the next three years. That is what stress tests are about: proposing an extreme scenario and seeing whether banks have sufficient capital to withstand it. In fact, a level of capital that prevents institutions from having to go to the market to top it up.
Although, at the outset, this type of test had an additional objective, perhaps more relevant than the previous one: to give the market confidence in the situation of the sector and of each institution. On the one hand, to combat a crisis of confidence fuelled by systemic risks and contagion between institutions. On the other, to genuinely make their future viability or solvency known. Solvency and resilience: these are the two key aspects of the analyses carried out by the EBA on Friday.
However, it is true that, unlike the same analyses carried out in 2014, in this case it was not so much an exercise to assess the existence of institutions with low capital levels as an instrument to support the ECB’s supervisory task. Remember how, two years ago, the result of the tests was an additional factor of financial instability that led institutions to pay an extra cost over their fundamental valuation when seeking capital. To give you a sense of some figures: if the 2014 tests identified a capital need of up to 25,000 million over the following nine months, European banks raised 54,000 million in new capital and issued CoCos for a further 39,000 million.
