The deadline has been deliberately chosen: At 10 p.m. Central European Time on Friday night, after the close of financial markets in the United States, Europe’s top regulators will release the results of their latest round of stress tests, designed to gauge the health of the continent’s embattled banking sector.
The tests are being conducted by the European Banking Authority (EBA) and the European Central Bank into the balance sheets of 51 top banks across the 28-nation European Union. The idea is to test the health of banks against an imagined crisis scenario spread over the next three years and see how they hold up.
The test comes at a time when banking stocks have been taking major hits across the board in Europe, and especially in Italy. That’s part of the reason the results are being released late — giving investors two full days to digest the results before markets open again on Monday.
Adam Farkas has a busy few days ahead of him. The head of the EBA spoke to Handelsblatt shortly before the big release. In the interview below, Mr. Farkas defends the EBA against accusations that it has gone soft this time around. Unlike the last round of stress tests in 2014, no bank will actually pass or fail this time around. In Germany, there is also criticism that regulators aren’t looking at the effects of negative interest rates.
Mr. Farkas insists the lack of a pass/fail grade is deliberate, and doesn’t mean supervisors won’t be holding banks’ feet to the fire. Some banks may even face new capital requirements as a result of the test. But for most, he argues, Europe’s banking troubles have turned from an acute crisis into a slow-burning challenge of how to remain profitable over the long haul.
Overall, he says, the European banking crisis is only half-solved.