European banks to be stress-tested against two years of recession - source

BRUSSELS/FRANKFURT, April 25 Fri Apr 25, 2014 10:23am EDT

BRUSSELS/FRANKFURT, April 25 (Reuters) - European banks will be tested on their ability to withstand a recession stretching through 2014 and the following year as part of a landmark review into whether they finally have enough capital to withstand economic shocks, a source familiar with the tests said on Friday.

The European Banking Authority (EBA) is testing the capital adequacy of 124 of the EU's most important banks, but will not officially reveal details of the "stressed scenarios" banks will need to be able to withstand until next week.

Banks will be tested against economic growth in 2014 that is 2.2 percentage points below the European Commission's 1.5 percent forecast, implying a 0.7 percent contraction, a person familiar with the figures told Reuters on Friday, confirming a report by newswire Bloomberg.

For 2015, banks will be tested against economic growth that is 3.4 percentage points below the European Commission's forecast, implying a contraction of 1.4 percent, the source added.

The scenarios are harsher than those applied in previous stress tests in 2011, when the "adverse" scenario was 2.1 percentage points worse for the first year in the tests' horizon - 2011 - and 2.0 percentage points worse for the second year.

Regulators are determined that the tests are stricter this time, even though Europe's economy has improved, because previous tests were deemed too soft.

Banks across Europe, such as Italy's Monte dei Paschi and Greece's largest banks including Piraeus and Alpha Bank have pre-emptively raised billions of euros of extra capital to try to be sure of meeting the tests' requirements.

Others, most dramatically Italy's Unicredit, have set aside billions extra to cover loan losses.

"The idea of a more benign outlook from a short-term perspective doesn't stand up to scrutiny," said a second source with knowledge of the projections, pointing to increased uncertainty in global markets as a key risk which banks face.

The European Central Bank (ECB) is heavily involved in 2014's round of stress testing and wants to ensure any capital issues are identified and resolved before it assumes direct supervisory responsibility for the euro zone's 128 most important banks in November.

The stressed scenarios were set by the ECB in 2011, and by the European Systemic Risk Board, which is chaired by ECB President Mario Draghi, in 2014.

The ECB declined to comment. (Reporting by Reuters Bureaus; Editing by Alex Smith and David Holmes)

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