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European Banking Regulator Lays Out Stress Test Framework

BRUSSELS (The Deal) -- About 124 European Union lenders participating in a Europe-wide stress test will have to have core capital ratios of 8% at the start and show that levels won't fall below 5.5% under adverse conditions, the European Banking Authority said Friday.

The London-based regulator will conduct the test in coordination with the European Central Bank, which will use the same methodology for its own three-part health check of European lenders, including a so-called asset quality review, as it prepares to take over as the euro zone's single banking supervisor later this year. The European Banking Authority will at that time remain the main supervisor for the wider 28-nation European Union.

On Friday, the EBA said it would judge the resilience of EU banks between 2014 and 2016 under a common baseline and an "adverse microeconomic scenario," taking in credit risk, market risk, sovereign risk, securitization and the cost of funding. Both trading and banking book assets will be subject to stress scenarios, as will assets held off banks' balance sheets.

The EBA will coordinate the EU-wide stress tests based on information gathered by national authorities. The latter will be allowed to include additional risks and country-specific sensitivities beyond those outlined by the EBA Friday, the EBA said. But it added that "the published results should allow understanding the impact of the common set of risks in isolation."

The EBA plans to launch the tests in April and publish the results in October. It is under pressure to deliver a flawless report this time around, after missteps in previous stress tests. It endorsed Allied Irish Banks Group in 2010 and Franco-Begian Dexia SA/NV in 2011, months before each collapsed and had to be rescued.

A sample of 124 banks from 22 EU member states will be tested, covering at least half of each EU member state's banking sector. The banks to be tested will include Germany's Deutsche Bank AG and Commerzbank AG, France's Credit Agricole SA and BNP Paribas SA, HSBC Bank plc and Lloyds Banking Group plc of the U.K., Banco Santander SA in Spain, and Italy's UniCredit SpA and Banca Monte dei Paschi di Siena SA.

Siena-based Monte dei Paschi continues to push for a quick 3 billion ($4 billion) capital increase, over the objections of its largest shareholder, the Monte Paschi Foundation, which has been pressing for a delay.