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Reliability of EU Bank Stress Test 2011: was the Core Tier 1 capital ratio suitable for using as pass/fail criterion?

Posted by Kristi Rohtsalu on July 22, 2011 at 18:12 in Opinions

In my opinion, the reliability of EU bank stress test is not only undermined by the “not-stressful-enough” scenario, but also (and perhaps even more importantly) by the methodical limitations of Core Tier 1 capital ratio calculation (which was the criterion of passing / not passing the test).

According to my analysis, if the stress test calculations are corrected for these methodical issues, at least four more “perfectly healthy” banks effectively failed the test (including two of the very large players) based on the very same “not stressful enough” scenario. In addition, around ten more banks should have been placed to “watch list”.

I have recorded a 14-minutes presentation /explanation on this matter. The video is available at LogicOfFinance.com website: http://beta.logicoffinance.com/2011_EU_Bank_Stress_Test.php

 

Official stress test results are available on EBA's website: http://stress-test.eba.europa.eu/

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Tags: basel, eu, ii, bank, capital, ratio, stress, test, testing
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