ECB comprehensive assessment Capital shortfall less than expected

The result of the ECB’s Asset Quality Review (AQR) and stress test, including the fact that 12 out of the 25 have already covered their capital shortfall, is better than feared. Importantly, there were no major banks failing the tests. It should overall reduce tail risk from the banking sector.

The ECB only sees EUR9.4bn in capital shortfall on an aggregate level, which should be considered positive. Italy and Greece have the largest shortfalls but the latter is already managed by the European Commission’s restructuring plans.

For Italy, nine out of 15 supervised banks have a capital shortfall as of end-13 and adjusting for net capital changes throughout 2014 this still leaves four banks with a total capital shortfall of EUR3.3bn.

The limited capital shortfall in the euro area reflects that banks have already raised capital in anticipation of the comprehensive assessment and going forward shortage of bank capital should be a smaller headwind for credit creation and economic activity.

The stress test should be deemed credible as the adverse scenario implies a reduction in the median CET1 of 4pp. Compared to previous tests this is tough.

We expect the release of the AQR and stress test to bring some relief to the markets as the exercise has been a concern throughout this year and the results are better than feared, while the stress test should still be considered tough.