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July 12, 2010
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In an effort to restore the transparency and reliability of the European banking system, the Committee of European Banking Supervisors, consisting of European Union regulators are planning to disclose the findings on July 23. The test that covers around 91 banks, account for 65% of the banking market in Europe and approximately 50% of the market share in each member country.
As a result of this widening of the stress test net, banks such as German Landesbanken and the Spanish thrift institutions, or cajas would be included. Though these banks are not the largest banks in the region, their financial weakness prompted a market uncertainty. Additionally, major Irish banks that had not been included in the prior year’s test will be incorporated this year.
Multinational banks in Europe will be tested. This includes HSBC Holdings, plc. (HBC) and Barclays plc. (BCS) in Britain, Deutsche Bank AG (DB) and Commerzbank (CRZBY) in Germany, and BNP Paribas (BNPQY) and Societe Generale SA (SCGLY) in France.
Banks will be tested to see whether they have sufficient financial strength to survive serious economic shocks. A three percentage point deviation from the growth predictions of the European Commission for the next two years would be considered and the capacity of banks to withstand such situation would be assessed.
Evaluations would be based on banks’ ability to absorb additional potential shocks from credit and market risks including sovereign risks. Additionally, the level of dependence of individual banks on the government or the central bank would also be assessed.
This is in contrast to the last year’s stress test, when a small number of banks were covered and only aggregate results were published. The decision to process more banks through the stress test comes amidst pressures on European banks. The interbank lending market strangled in May this year with uncertainties about the susceptibility of institutions to the Greek debt default and the significant declines in bond values that Spain issued.
As of now, we remain cautious about the overall health of the European banking system and wait for stress test results to unfold.
Read the full analyst report on "HBC"
Read the full analyst report on "BCS"
Read the full analyst report on "DB"
Read the full analyst report on "CRZBY"
Read the full analyst report on "BNPQY"
Read the full analyst report on "SCGLY"
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