ECB Eases European Bank Stress Test By 25%, Lowers Capital Ratio Requirement From 8% to 6%

Tyler Durden's picture

First the Volcker Rule was defanged when last night the requirement to offload TruPS CDOs was eliminated, and now here comes Europe where the ECB just lowered the capital requirement for its "stringent" bank stress test (the one where Bankia and Dexia won't pass with flying colors we assume) by 25%. From the wires:

  • ECB SAID TO FAVOR 6% CAPITAL REQUIREMENT IN BANK STRESS TEST
  • ECB SAYS DECISION ON CAPITAL REQUIREMENT NOT YET FORMALLY MADE
  • MAJORITY OF POLICYMAKERS AND TECHNICALS OFFICIALS HAVE REACHED CONSENSUS ON THE BENCHMARK

The final number may in fact be even lower:

  • SMALL NUMBER OF COUNTRIES WANT AN EASIER BENCHMARK AND MAY PRESS FOR COMPROMISE LOWER THAN 6%

Why is this notable? Recall from three short months ago:

The European Central Bank said it will use stricter rules when stress testing banks’ balance sheets next year than it will to study their assets, as it seeks to prove its credentials as the region’s financial supervisor.

 

While the ECB confirmed that it will require lenders to have a capital ratio of 8 percent, what qualifies as capital will change over the course of the three-part assessment, the central bank said in an e-mailed statement. The capital definition applicable on Jan. 1, 2014 will be used for the asset-quality review and the definition in force “at the end of the horizon” of the stress test will be used in that evaluation, it said.

 

Ignazio Angeloni, who is head of the ECB’s financial stability directorate, said today in Frankfurt that officials haven’t yet decided on a timeframe or on details for the stress test. The European Union is gradually phasing in global capital standards known as Basel III, a process which is due to be completed by 2019.

 

“We’ve got a feasible but safe capital cushion of 8 percent,” Angeloni told reporters. “We want the exercise to encompass all the main sources of risk.”

Apparently you don't, but who cares as long as the myth of strong European bank balance sheets is perpetuated. And should the capital requirement be lowered even more, expect politicians and central bankers to bang the drums even louder on just how stable the European financial system is.

Some additional color from Bloomberg on what is becoming a complete farce of a stree test:

The European Central Bank favors requiring banks to show they can retain capital worth 6 percent of their assets when it puts them through a simulated recession later this year, said two euro-area officials with knowledge of the matter.

 

A majority of policy makers and technical officials have reached consensus on the benchmark for the ECB’s stress test, the people said, asking not to be identified as the deliberations aren’t public. The threshold must still be agreed on with the European Banking Authority that coordinates the exams, and a small number of countries wanting an easier benchmark may press for a compromise lower than 6 percent, one of the people said.

 

For the rest of the ECB’s bank balance-sheet review, known as the Comprehensive Assessment, the central bank is using a minimum capital requirement of 8 percent to evaluate lenders’ health under current conditions. That figure was reported by Bloomberg News on Oct. 22 and confirmed by the ECB a day later.

In other words, 8% under "current conditions" except in a "simulated recession" when the ECB will lower its capital needs requirement to 6%. One assumes the "simulated recession" will be different than the all too real recession Europe, and its record high unemployment, are currently in? And also, just when will the ECB expose how many hundreds of billions in bad debt loans the European banking system is currently toiling under?