The ECB’s guideline for the next banking sector evaluation has taken the European Stock Markets by surprise. The euro zone financial entities’ shares, especially the Italian ones, were strongly punished on Wednesday, as well as the Spanish, some of which recorded decreases over 3%.
The European institution has decided to become stricter than ever and warned that the evaluation will affect 128 euro zone banks this time (16 of which are Spanish, being again the country with more entities put to the test), and will be much more rigorous and demanding that last reviews. The ECB’s aim is to recover the stress tests’ credibility considering that they did not reflect the sector’s real situation in their two previous editions.
The tests are to cover all entities’ balance assets, including the non-performing and restructured loans, as well as sovereing debt exposures. The ECB will also demand a mimimum base capital of 8% over the weighted assets.
The asset review will be the ground for the stress test that the European Banking Authority (EBA) will perform in the second half of 2014, whose criteria (totally homegeneous this time) are expected to be published shortly.
It also will be very important to know the details that the EBA is going to fix regarding entities’ liquidity, leveraging and financing in order to make individual estimations for each of them. It cannot be ignored that those banks which have demanded for ECB’s liquidity more frequently (many of them are Spanish) could suffer some kind of punishment.
What we know at the moment is Mario Draghi sent a letter to the European Commission to help the Italian banks, for they seem to be the weakest when facing the tests.