Ninety banks and an own-brand core equity requirement of five per cent of risk-weighted assets…
That’s one less bank than last year and a lot of capital questions (The merged cajas of last year have reduced the tally a bit). We already had the methodology on the stress-test scenarios – this release is the pass mark:
From the European Banking Authority on Friday:
The European Banking Authority (EBA) today agreed to adopt a benchmark of Core Tier 1 (CT1) against which to assess banks in the 2011 EU-wide stress test. The CT1 benchmark will be set at 5% of risk weighted assets.
This CT1 definition will be used solely for the purpose of the EU-wide stress test and refers to specific criteria which will be applied consistently across all countries participating in the exercise…
But ignore that bumbf and have a look at the nasty surprise for German banks in the EBA’s Q&A:
Q: Why has the EBA chosen to use Core Tier 1 (CT1) as a benchmark this year?
A: The EBA wanted to define criteria for capital that is simple, issued directly by the institution itself and able to meet the criteria of permanence, flexibility of payments and loss absorption in going concern situations.
Q: Are all government support measures included in the EBA Core Tier 1?
A: The EBA Core Tier 1 definition only includes instruments subscribed by public authorities under government support schemes and put in place under exceptional circumstances. Furthermore, a distinction is made in terms of disclosure between ordinary shares subscribed by governments and other government support measures.
Tod der stillen Einlagen! Some “silent participations” (Germany’s hybrid capital in some banks) anyway. No wonder Commerzbank has been cash-calling.
There’s also a tortuous explanation of why the EBA is using its own-brand definition of core equity versus Basel III definitions, but we’ll spare you (different rules over deductions, basically).
There’s a full list of participating banks here. Eagle-eyed readers will spot Norway taking part in a EU stress test for the first time.
Another document – this list of EBA mitigation measures includes future planned capital increases by banks. It rings a little queasily to us, but these are European stress tests — what should we expect?
Update – More from the FT on the silent participation issue:
The EBA has spent the past three weeks battling with national regulators, particularly in Germany, over the definition of core tier one capital. It… cannot allow the inclusion of so-called silent participations, German instruments typically held by German regional governments as part of the capital structure of Landesbanken.
The authority believes the banks are legally obliged to participate in the exercise but cannot be forced to allow publication of the results.
Two Landesbanken – Hannover-based NordLB and Frankfurt-based Helaba – will be the hardest hit, though NordLB is negotiating a plan to convert some of the state’s silent participations into full-blown equity.
Related links:
The incredible restructured stress test - FT Alphaville (2010)
How stress tests made European bank funding worse – FT Alphaville