AQRs and stress tests – has it been worth the wait?


It seems like we have been talking about the Comprehensive Assessment – the asset quality reviews (AQR) and stress tests - forever.  Has all the effort been worth it and what happens next?


The results published yesterday show, as many have predicted, that a number of banks, out of more than 120 tested, will need to take some remedial action. As expected, Italian banks figure high in the list.


Whilst 25 banks have been judged to be short of capital as at the 31 December 2013 testing date, 12 of these are technical failures as they have since raised new capital. For the remaining 13 there is now a requirement to prepare a remediation plan to address their capital shortfall. Along with many commentators I predicted that Italian banks were likely to be under the spotlight and 4 of these 13 are Italian.


Although much of the speculation leading up to the publication of the results has focused on how many and which banks will fail, I believe such speculation misses a broader point. For the first time, we now have more than 10,000 data points on a consistent basis concerning bank balance sheets. This will provide the market and investors with a rich data set to compare and contrast the state of the Eurozone’s banks.


Whilst the act of failure provides an immediate need for clean-up and new capital for a few banks, I think, in the end, it will be the market that provides the impetus for continued (much needed) restructuring of the banking sector. In a world with long term changes in trade flows, increasing costs of regulation and increased operational risks, too many banks continue to hold assets which are likely to remain poorly performing for at least the medium term, or do not fit with a viable longer term business model.


The disposal of non-core lending by banks has reached new highs in 2014, with the face value of  loan portfolios transacted likely to top €100bn this year. Whilst the immediate impact of the Comprehensive Assessment might not lead to a sudden spike in transaction volumes, as market pressures come to bear, transaction volumes will remain high for the foreseeable future.   


What do you think of the AQR and stress tests? Do they go far enough or can we rely on the market to provide the incentive for restructuring in the banking sector? Share your thoughts in the comments box below or set up a meeting to discuss your thoughts confidentially.

Richard Thompson |  Global Leader, Portfolio Advisory Group
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