Source: riskdynamics.eu
The United States has learned from its bad experiences during the Global Financial Crisis when almost its entire financial system was going down in flames. Stress tests to find out how banks would be able to deal with economic adverse scenarios became mandatory, and the European Union followed suit with its stress tests in 2011, followed by a series of check-ups later on.
Source: Daily Mail
Almost a decade has passed since the global financial crisis, and half a decade since the European stress tests, but the volatility and unrest in the financial world has never been this high. You would think that five years of ECB-supported lending would have helped these banks (as even though the net interest spreads did decrease, the access to the ultra-cheap lending facilities of the ECB allowed the banks to continue to generate positive results), nothing has changed, and more than 5 years after the term ‘PIIGS’ became one of the most well-known words to describe the economic mess in the weaker European, one of the I’s is now once again in serious economic trouble.
Source: Financial Times
The Bank of Italy has now publicly stated some of its banks will need more state support to merely stay alive as the position of these banks has been deteriorating since the Brexit vote. Some of the smaller ones have been forced to merge with each other to create larger companies which should theoretically be able to withstand economic shocks.
One would have expected the stress test of the ECB (with new results anticipated to be released at the end of this month), which was indeed focusing on how banks would deal with adverse economic scenario’s, and more importantly, how their capital ratios and balance sheets would hold up, would have taken care of the majority of these risks. After all, the banks had almost 5 years to hoard cash (by retaining their normal earnings) and to tap the market on opportunistic moments.
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