The European Union’s toughest-ever stress test was meant to leave banks with nowhere to hide, but the results show how the bloc’s capital rules got in the way, Bloomberg reported today. A total of 24 lenders failed the European Banking Authority’s (EBA) stress test with a capital shortfall of 24.6 billion euros ($31.2 billion). The EBA used EU rules as applicable over the three-year horizon of the test. These give national supervisors scope to allow banks to count instruments whose eligibility as core capital will be gradually eliminated over the next four years. Had the fully phased-in EU rules been applied, the number of failures would have increased to 34, according to a calculation by Bloomberg News based on EBA results published in London. That may be the more reliable gauge, since capital is a measure of a bank’s capacity to absorb losses, and the jury’s still out as to how well instruments such as goodwill and some deferred tax assets, admitted in the definition of "capital" used in the stress test, could do that job.
