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Financial tests

January 14, 2011

After numerous banks passed financial stress tests with flying colors only to be rescued later by government bailouts, planning is underway for a more demanding set of trials of European institutions.

Frankfurt skyline
Big German banks will face another stress testImage: picture alliance/dpa

European Union authorities in the coming weeks will launch a second round of stress tests for large banks and insurance companies in the bloc, in a move to bolster confidence in the financial industry.

Last year's tests, particularly in the case of the banks, were criticized by numerous experts as being too weak. Just seven of the 91 tested banks failed.

Newly created regulatory body

None of Ireland's banks was among those that failed. Yet the Irish government just months later sought an 85 billion euro ($113 billion) rescue package not only to bridge a massive budget deficit but also to cover looming bank debts in the country.

Germany's Hypo Real Estate
Germany's Hypo Real Estate was one of nine banks to fail the first testImage: picture-alliance/ dpa

The European Banking Authority (EBA), a newly created regulatory body, said Thursday it will conduct EU-wide tests in the first half of 2011, with the results to be published in the middle of the year.

Domestic financial regulators, the European Systemic Risk Board, the European Central Bank and the European Commission will be involved in the 2011 stress tests, according to the new regulatory body.

The EBA said it will separately initiate a review of liquidity funding risks across the EU banking sector.

EBA spokeswoman Franca Rosa Congiu told Deutsche Welle that the tests will cover a "broadly similar" group of banks and that the methodology and approach will be similar to the measures used for the first test.

Congiu said the next round of testing will include changes but declined to comment on what they could be. "Many of the details still need to be defined," she said.

Reveal serious weaknesses

Rather than quelling doubts about the strength of banks in the eurozone, last year's bank stress tests left the impression that they were trying to hide rather than reveal serious weaknesses. Markets are now in no mood for games, as the rising costs of borrowing even in France and Germany show.

Irish euro coin
None of the Irish banks failed last year's stress test but some later needed helpImage: picture-alliance/dpa

The bank stress tests are part of the new European System of Financial Supervision framework designed to assess the resilience of the financial sector and will be conduced in parallel with a second EU-wide stress test for the insurance sector.

The European Insurance and Occupational Pensions Authority (EIOPA) plans to beginning conducting test for insurance companies in the second quarter of 2011.

The tests, which will cover at least half of the insurance companies per country, aim to "identify and quantify the impact of the different stress scenarios on an insurer's financial position in an adverse and very severe economic environment," the authority said in a statement.

Author: John Blau

Editor: Sean Sinico