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27.10.2014 15:37:51

The Asset Quality Review and stress test: where to next? - News by European Banks Analyst Justin Bisseker

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The Asset Quality Review and stress test: where to next?

October 2014

Justin Bisseker, European Banks Analyst, looks at the results of the tests and some of the more subtle conclusions he expects the equity market to focus on.

The weekend has seen much excitement for European bank watchers with yesterday's release of the conclusions of the Asset Quality Review (AQR) and stress test.  Both parts of the exercise should be of interest to investors, although much of the media interest thus far has just been on who has passed and who has failed.

So, what has been done? Firstly, the European Central Bank (ECB) has conducted an in-depth review of bank balance sheets ahead of its taking the helm as the eurozone's banking regulator next month. This has certainly been a detailed process - far more so than any investor could reasonably undertake. More than 119,000 borrower files and 170,000 collateral valuations were reviewed across 130 eurozone banks to ensure a uniform provisioning methodology and harmonised definitions. 18% of these credit files required some form of adjustment. These results were then extrapolated such that the majority of banks' material portfolios were covered in detail. Banks are required to maintain a 'phased' core Tier 1 capital ratio in excess of 8% post any required adjustment
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