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European banks to face tougher stress tests

European banks to face tougher stress tests
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The European Union’s powerful new banking watchdog has told lenders that it will impose tough new tests on them.

They will have to prove that their reserves and systems would be able to cope with a future severe economic crisis.

Over the next few months the European Banking Authority is set to conduct “stress tests” on 88 EU lenders holding around two thirds of the region’s banking assets.

In documents sent to banks to prepare them for the tests, they are told that they will be “composed of three elements: a set of EU shocks – mostly tied to the persistence of the ongoing sovereign debt crisis, a global negative demand shock originating in the US and a US dollar depreciation vis-a-vis all currencies.”

The EBA, launched in January with powers to impose binding standards on member states, is being watched to see how credible this year’s test will be in restoring confidence into a sector that still depends on government support in some cases.

The tests are tougher than those carried out last year by the EU on 91 banks. At that time only seven failed and none of them was from Ireland whose banking sector the EU and International Monetary Fund had to bail out later.

Since Europe’s banks were found to need only 3.5 billion euros in fresh capital at the time, the stress test was widely viewed as having been far too lax.

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