About 25 banks will fail tests meant to ensure they are prepared to survive another crisis when the European Central Bank reveals results Sunday, according to media reports.
Bloomberg on Friday obtained a draft of the stress test results that indicated that 25 of the 130 banks tested by the ECB were found to be inadequately prepared for a shock.
Of those, roughly a dozen will be required to raise additional capital to meet the requirement that they maintain 5.5 percent equity as a share of total assets in the simulation of an adverse scenario that includes two years of recession for the eurozone.
The Wall Street Journal reported that those dozen banks would include Italian banks, but none from Germany or France. The ECB declined to comment on the report, responding to the Journal that “[a]ny inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final.”
The stress tests are conducted to increase confidence in the banking system’s stability and ability to continue functioning in the event of a downturn. The number of banks failing the tests has risen in recent years. ECB president Mario Draghi has said that banks need to fail in order to demonstrate that they are being held to a high standard of safety.
The ECB, which will become the single supervisor of the euro area’s biggest banks in November, also has launched a number of programs to increase bank lending to help restore the financial system to health and promote growth. Eurozone unemployment remains above 11 percent, as economic growth has stalled out in recent months. The International Monetary Fund warned early in October that there was a greater than one-in-three chance that the eurozone would fall into recession in the next six months, with similar odds of deflation.
U.S. bank regulators have conducted similar stress tests on American banks since 2009. The Federal Reserve and the other agencies responsible for the tests announced Thursday that the 2015 versions of the stress tests would simulate a scenario in which unemployment spiked to 10 percent, stock and housing prices collapsed and the price of oil rose to $110 a barrel.
