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European banks clear stress test, but Barclays shocks

On Friday, the European Banking Authority (EBA) published the results of the 2018 stress tests, which showed that all the participating banks had satisfactory liquidity to fend off a 2008-like financial crisis. However, contrary to what market experts had expected, British banks Barclays and Lloyds scored lowest among the 48 banks that underwent the test.

A common tier ratio of 5.5% was regarded as the threshold of a liquidity crisis. Anything below that meant the firm had to unload some of its risky assets in order to maintain shareholder confidence. Barclays scored the lowest, with a common tier ratio of 6.37%, followed by Lloyds with a score of 6.8%. According to EBA, the low scores are primarily attributable to their wide credit exposure.

Barclays fare poorly in European stress test
Image: Wikimedia Commons

Italian banks were expected to fare poorly in the test, given the recent economic crisis and the decrease in government bond valuation, but they still fared better than Barclays. The worst performer from Italy was Banco BPM, with a score of 6.67%, followed by UBI Banca, with a common tier ratio of 7.42%. The largest lender of the country, Unicredit, registered 9.34%.

Meanwhile, Frankfort-headquartered Deutsche Bank performed relatively better with a score of 8.14%. The central bank of the United Kingdom, The Bank of England, will announce its own stress test results in December, the financial institution said on Friday.

Director of Economic Analysis and Statistics at the EBA, Mario Quagliariello, said, “The outcome of the stress test shows that banks’ efforts to build up their capital base in the recent years have contributed to strengthening their resilience and capacity to withstand the severe shocks and material capital impacts of the 2018 exercise. The results will be used by supervisors as part of their wider assessment of banks’ vulnerabilities and input to their supervisory decisions”.

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Earlier in June, US-based banking giants had cleared stress tests conducted by the Federal Reserve. It may be noted that US banks are currently ahead of their European counterparts in terms of loan quality, profitability and cost discipline.

 

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