02 Dec 2011

Placing EU Banks under Undue Stress

Karel Lannoo

Download Publication


This Commentary surveys the latest round of stress tests administered to EU banks by the European Banking Authority (EBA) and finds their exclusive focus on a single measure of capital, the Tier 1 capital ratio of Basel III, short-sighted. While the first two stress tests underestimated the capital needs in the European banking system, the third test risks overestimating the picture in some cases. By solely employing a 9% Tier 1 ratio, with a correction for market valuation of sovereign exposures, the overall end result is that banks with higher risk-weighted assets in embattled sovereigns need to put up more capital than those with lower risk-weighted assets in the core eurozone countries. This has the effect of unduly penalising banks that provide credit to the real economy in those member states where it is most needed.

Karel Lannoo is Chief Executive Officer and Senior Research Fellow at CEPS.

Related Publications

Browse through the list of related publications.

Multi-Layered Actions?

Sustaining Partnerships in the EU Integrated Approach to Conflicts and Crises

The Recovery and Resilience Facility

A springboard for a renaissance of public investments in Europe?

Limitations on Human Mobility in Response to COVID-19

A preliminary mapping and assessment of national and EU policy measures, their sanctioning frameworks, implementation tools and enforcement practices

Central bank digital currencies

Can central banks succeed in the marketplace for digital monies?

EU defence projects

Balancing Member States, money and management

Between politics and inconvenient evidence

Assessing the Renewed EU Action Plan against migrant smuggling