FRANKFURT, Germany (AP) - European authorities will put their biggest banks through a test scenario that envisions plunging stocks and bonds and a steep loss of a full 7 percentage points of growth over three years.
FRANKFURT, Germany (AP) — European authorities will put their biggest banks through a test scenario that envisions plunging stocks and bonds and a steep loss of a full 7 percentage points of growth over three years.
The European Banking Authority on Tuesday detailed the scenario the banks will be put through to gauge their health. The stress tests are aimed at weeding out shaky banks so financial institutions can better support growth and jobs. Weak lending is a key factor holding back the recovery in Europe and helping keep unemployment high.
Banks will have to maintain adequate financial buffers even if growth falls well short of official predictions through 2016. Banks that flunk would have to ask investors for more capital, or take other steps such as cut back dividends or bonuses.
European officials are trying to make this test rougher than a 2011 version applied to 90 banks. Some banks passed that one but had then had to be bailed out by taxpayers.
Officials say this test of around 130 of Europe's biggest banks will be more rigorous because it will be preceded by a bank review by the European Central Bank. The review will make sure banks assets, such as loans, are really worth what the bank says they are, and that should make the starting point for the stress test more reliable. Results are expected in October.
The test will envision a scenario in which economic output falls 0.7 percent this year in the 28-country European Union instead of growing of 1.5 percent, with a drop of 1.5 percent next year instead of growth of 2 percent. In the third year, 2016, it envisions weak growth of 0.1 percent growth instead of the official EU forecast of 1.8 percent growth.
EBA head Andrea Enria said the test will be "a robust and effective tool for supervisors to address remaining vulnerabilities in the EU banking sector."
The hope is that the tests will force banks to shape up so they will be more able to lend money to businesses and consumers at affordable rates, helping growth. The economy of the 18 countries that share the euro grew a modest 0.2 percent in the first quarter, with high unemployment of 11.9 percent.
Data released Tuesday from the European Central Bank showed bank loans to businesses fell 3.1 percent in March from the same month a year ago. Analysts say weak lending is a due on the one hand to little demand from businesses unwilling to risk borrowing, and, on the other hand, limited credit offerings from banks who fear a slow economy increases the chance they won't be paid back.