The following is an excerpt from the Financial Times:
Last week, 25 banks failed the asset quality review (AQR) conducted by the European Central Bank for 130 of the eurozone’s largest banks. In the stress test performed by the European Banking Authority on 123 of the EU’s largest banks, 24 failed.
These latter had a capital shortfall under the adverse macroeconomic scenario amounting to €24.6bn – 0.09 per cent of assets worth €28tn, 70 per cent of the EU total. After allowing for capital raised or converted since the beginning of 2014, 14 banks remained short by €9.5bn – about 0.03 per cent of assets, according to the stress test.
On October 27, Professors Viral Acharya and Sascha Steffen published an alternative estimate, using a different methodology, for 39 publicly listed eurozone banks with a combined balance sheet of €12.5tn (a subset of the banks in the EBA stress test and the ECB’s AQR). They calculated a shortfall of €450bn at the end of 2013 – about 3.6 per cent of assets.
Both capital shortfall numbers are point estimates. Both are therefore bound to be wrong. Which one is likely to be closer to the true figure? I put greater faith in the estimate of Profs Acharya and Steffen. The EBA has a long record of stress tests that grotesquely underestimate the capital holes in EU banks. Both the AQR and the stress test relied heavily on national regulators and supervisors – the very entities on whose watch the excesses that led to the financial crisis were allowed to fester and compound.
Read the full article on the Financial Times here.
More information on Professor Acharya’s research was also highlighted this week in the Financial Times.