EU regulators all set to introduce tougher stress tests for banks
European regulators are all set to introduce a tougher set of tests for the region's banks, as part of the efforts to prevent the recurrence of 2008-type economic crisis.
On Tuesday this week, the European Banking Authority (EBA) will introduce various crisis scenarios that the region's banks will have to prove they can endure without the help of taxpayer bailouts.
All regional banks that fall short of capital under the predictable crisis scenarios will have to furnish their plans on how they would enhance their reserves by raising funds from investors, offloading assets or hanging on to profits rather than paying dividends.
The regulators' previous stress tests for banks had suffered severe criticism for being too soft. Thus, the soon-to-be announced stress tests are likely to be the toughest to date.
Mark Zandi, Philadelphia-based chief economist at Moody's Analytics, said, "The key is that the scenario is at least as deep and dark as the great recession, the financial crisis of 2008/2009. You can easily conceive a scenario as severe as what we went through."
European banks have reportedly already raised billions in fresh capital from investors and undertaken other reforms ahead of the launch of the new stress tests, which some experts believe will refocus on lending to enhance growth.
A source familiar with the crisis scenarios said there was a case for applying tougher stress tests for countries that hadn't yet suffered major crises as those countries could fall further. But, this idea would be challenged by countries like Germany.