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ECB's bank stress test results ease concerns over EU banking sector - BTMU

FXStreet (Łódź) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ comments on the positive outcome of ECB's AQR and stress tests which initially boosted investors' confidence in Europe's banking sector and lifted the euro towards the 1.2700-level.

Key Quotes

"The ECB found that 25 out of 130 banks failed their comprehensive assessment requiring an additional EUR24.6 billion of capital under the adverse economic scenario. However, many of those were technical failures because the banks have since raised additional capital after December 2013 which was the cut-off date for the comprehensive assessment."

"The FT has reported that EUR56 billion of additional capital has been raised between January and September 2014. After adjusting for the additional capital raised, the comprehensive assessment revealed that only thirteen banks still need to raise additional capital having a total capital shortfall of just EUR9.5 billion."

"Weakness was most evident in the Italian banking sector which accounted for four out of the thirteen banks which still need to raise additional capital. Italian officials have noted that their banks did not benefit from nearly as much government assistance as other countries during the crisis."

"Vice-director general of the Bank of Italy Panetta has stated that the result of the investigation was “reassuring and not surprising” while insisting that it was highly implausible that the country’s economy would see a five-year recession which was included in the adverse scenario in the ECB’s stress tests. The banks that failed the stress tests now have two weeks to present plans to address the capital shortfalls and up to nine onths to raise the additional capital. The Asset Quality Review also revealed of note that banks had an additional EUR136 billion in non-performing exposures."

"ECB Vice President Constancio stated that banks may now be more willing to provide loans more easily while cautioning that demand for credit was improving only slowly. He added that the ECB expects banks to take up a larger amount of funds at the next scheduled TLTRO in December."

"He hoped that recent developments would help to really start to change tight credit conditions in the euro-zone which have been holding back growth. He expected the failed banks to be able to raise required capital without needing public money if desired."

"The ECB will release in the week ahead their latest bank lending survey for Q4. The previous survey revealed that credit conditions offered by banks to their corporate clients eased for the first time since the crisis."

"It would be reassuring if credit conditions continued to ease in the second half of this year. If the improving credit impulse was reinforced by the ECB’s comprehensive assessment it could prove more supportive for economic growth in 2015 helping to ease downward pressure on the euro in the year ahead."

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