Stress tests begin for lenders

Crunch time has arrived for the Greek credit sector as the European Central Bank and the European Banking Authority began on Monday the much-anticipated stress tests on all major lenders in the eurozone whose purpose is to examine the consequences of any possible deterioration in economic conditions on loan portfolios.

Banking sources say that the heads of the ECB and the EBA will hold meetings with bank officials after the second week of September to discuss methodology issues and present some of their findings, but without telling them the results. After the meetings the banks will have a good idea of the ECB’s intentions and strategy and even of the exercise’s possible outcome.

The decisive point that may well determine if banks need additional capital is whether the ECB test banks based on their dynamic elements – i.e. the forecast concerning the course of their main figures and the creation of internal capital through asset sales – or on their static picture from the end of 2013.

EU banks had until December 31, 2013 to have their restructuring plans approved by the European Commission for them to be considered for the stress tests, but the Greek lenders only had theirs approved between April and July 2014. However the ECB has said it will factor them in regardless, although it remains unclear to what extent the dynamic elements will be taken into consideration.

Sources say that the ECB will examine the level of progress and compliance of each bank to the Commission’s requirements, and that that will determine whether the dynamic or static picture will be used.

According to the ECB timetable, the final results of the stress tests will not be issued before mid-October, with the most likely date being Friday, October 17, according to analysts. Banks will find out the results just before their publication, and then will have two weeks to announce how they plan to cover any capital requirements.

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