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Bank test with no mercy

April 29, 2014

The European Banking Authority has announced it will scrutinize the resilience of EU banks more rigorously than ever before. It says anything less would be unfit to restore confidence in an industry rescued by taxpayers.

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BNP Paribas Bank
Image: picture-alliance/dpa

European banks were requested to show they'd be able to survive simultaneous shocks in the bond, property and stock markets, the European Banking Authority (EBA) said Tuesday in explaining the details of the toughest stress test for lenders ever.

EBA said the test for 124 large banks was designed to show whether or not they'd still have enough capital to keep afloat after facing a toxic cocktail of simulated economic shocks.

The regulators set out specific scenarios for lenders such as Deutsche Bank, BNP Paribas and Barclays for a test whose results were to be published in October.

Expect no leniency

EBA officials said banks needed to show they could cope with a cumulative loss of 2.1 percent in economic output. The idea is that a poor economic performance would push up joblessness to at least 13 percent and send house prices down by 20 percent on average. This would trigger defaults on loans held by banks.

"The exercise's full transparency will be key to its credibility," EBA Chairman Andrea Enria said in a statement. "It will show how efforts recently undertaken by EU banks are already bearing fruit."

Stress test for European banks

The EBA watchdog said lenders that failed the test would be given some more time to address weaknesses by raising money from investors, scrapping dividends or selling assets.

hg/ kpc (Reuters, dpa)