Greek banks bracing for dynamic stress tests

By Evgenia Tzortzi

The upcoming stress tests which the European Central Bank (ECB) is to conduct on 128 European banks, including four Greek lenders, are expected to be based on a dynamic model that will also take into account their restructuring plans, according to a manual published by the ECB on Friday.

The blueprint describes how it will incorporate the findings on the quality control of assets in the stress tests, which will evaluate the banks’ capital adequacy, determining the required amounts of new capital infusions. According to the ECB, the evaluation of banks that have drawn up restructuring plans, including the four Greek ones, will not be limited to the static model which will examine the relevant figures on the basis of the balance sheets for 2013. The “simulation” tests will take into account the effects of the implementation of the restructuring plans, part of which will be executed after the test results for the 128 European banks are announced, scheduled for early October. The restructuring plans will also be put through similar tests, as they will be evaluated on the basis both of the main and the unfavorable scenario – that is, the likelihood that the banks will not fetch the sale prices which they have budgeted for their assets.

The development suits the four Greek banks – Piraeus, National, Alpha and Eurobank – which aim to limit any capital requirements through the implementation of the restructuring plans that have already begun and are scheduled to run until 2016. Asset sales are seen moderating the required new capital amounts to under 5 billion euros.

It should be noted that the case of Portugal’s Banco Espirito Santo, which last week reported first-half losses of 3.58 billion euros, will harden the ECB’s stance as regards the capital requirements it will prescribe, especially given the criticism it has come under for its regulatory failure in such cases.

An important factor seen having an unfavorable effect on banks is the projected fall in real estate prices, which, according to the worst-case scenario is estimated to total 30 percent in 2014-16.

ECB Vice President Vitor Constancio said, “We are making a great effort to ensure that this procedure is strict.”