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Sunday EU bank stress tests outcome publication in focus - BTMU

FXStreet (Łódź) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ looks at the possible results of ECB's EU banks' stress tests and the market reaction.

Key Quotes

"The much anticipated AQR and stress test results will be released on Sunday at 12 noon CET and will likely garner much attention for the markets on Monday morning. The focus initially will probably be on the capital short-fall of the 130 banks tested based on the asset quality review (unlikely); the baseline stress test scenario (possibly) and the adverse stress test scenario (probably)."

"The AQR is based on balance sheets as of the end of 2013 and so there will be an added complication in the reported results of banks that may have failed but have since the end of 2013 recapitalised already. Newswires have reported capital that has been raised already to be in the region of EUR 40-50bn while ECB President Draghi has stated that balance sheet “strengthening” over the past year has been in the region of EUR 200bn, taking account of asset disposals, and capital-raising through share issuances and retained earnings."

"The market appears to be braced for an overall capital short-fall in the low tens of billions. The results will also clarify exactly how much capital has already been raised since the end of 2013 when the AQR assessment was conducted – so this figure should perhaps be included in the capital short-fall total and on that basis, we may have a capital short-fall total between EUR 50-100bn."

"The key though will be credibility and transparency and given the work that has gone into this exercise and given it will form the basis for the ECB becoming the new main banking supervisor under the Single Supervisory Mechanism, we think there is a much higher chance of a more credible and transparent exercise."

"Evidence suggests (see chart above) that demand for loans in the euro-zone has picked up and if this is the case, resolving the supply-side of the banking lending equation will be key for a sustained pick-up in bank lending taking place. Assuming the combined capital figure range I mentioned above is roughly accurate we do not expect the euro to move significantly on these results although we do think they may well prove very important for a more sustained recovery in bank lending over the medium to long-term."

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