EBA Stress Tests Reveal Weakness Of British & Italian Banks

November 5, 2018
EBA Stress Tests Reveal Weakness Of British & Italian Banks November 22, 2018 Clive Nelson https://plus.google.com/110107075468979879828/

The European Union (EU) recently carried out a stress test for as many as 48 banks in the EU and the results showed that British banks Barclays and Lloyds had to work on improving their weaknesses, especially with Brexit looming.

The stress test was done by the European Banking Authority (EBA) to identify any capital holes so that government bank bailouts, like those done in 2008 during the financial crisis, would be avoided. The latest test is supposed to measure the ability of banks to weather market shocks. This includes events like rising political uncertainty and a rough Brexit.

Banks that were unable to complete the tough parts of the test without maintaining a capital ratio of above 5.5 percent were expected to face some consequences. This includes selling risky assets or raising more capital. Fortunately, none of the 48 banks tested ended up failing the test. However, Barclays and Lloyds were two of the three worst performers.


The final test results showed that Barclays had a final capital ratio of 6.37 percent and Lloyds had 6.8 percent. The main reason for their low rating is their exposure to riskier credit. British banks have recently been chasing high-risk credit to boost their returns, but it does expose them to the dangers of the market. The Bank of England has warned English banks to be more careful in their dealings with consumer credit.

Barclays and Lloyds responded to the news of the test by pointing out their current capital ratios as proof that they would be able to ride out any market shocks. Barclays claims to have a current capital ratio of 13 percent while Lloyds did not give an exact number but says it expects to increase its capital ratio another two percent before the end of the year.

Other Bank Performances

British banks were not alone in their weak performance. Italian banks also fared poorly. The country’s Banco BPM and UBI both ended up with low capital ratios. This was expected since the value of government bonds fell as the new government that came to power hasn’t been very appreciative of the EU. The rise in the country’s bond yields is damaging their capital and making borrowing more expensive.

The outcome of the tests does show the weakness of the European banking system. There is enough capital in the system but bad loans and weak earnings can damage things greatly. Overall, Europe’s banks lag behind US banks in terms of profitability, cost discipline, and loan quality.

About the Author

Clive Nelson

Clive Nelson Author

Hi, my name is Clive Nelson and welcome to Traders Bible. Just to tell you bit about myself…I have been trading FX and binary options for the best part of 10 years now. After graduating with honours in economics, I began working for an investment bank in New York as an assistant trader before working my way up. After a few years, I went on to work as a broker in London, England and then eventually came back to the U.S to work in a hedge fund, where I manage $800 million of my clients’ investments. There have been times over the course of my career where I’ve had to take a hit, but I’ve accepted that losing is part of the game, it’s a learning curve. I’ve learnt from my mistakes and you don’t have to make the same errors I did. A lot of my education came from when I was a broker and this is why I’m here to tell you that Traders’ Bible offers you the foundations of how to become a great trader.

Related Articles

US Current Account Deficit Narrows to Lowest Level in Two Years

The dollar index rose to 97.60 versus a bouquet of currencies Friday, near to levels never seen since early June

Goldman Sachs Forecasts Canadian Dollar to Strengthen Against Greenback in 2021, but Fall Against the Pound

The Canadian dollar had been underperforming this year, but global banking behemoth Goldman Sachs and BMO Capital Markets have suggested

ASIC Report Shows More Aussies Are Turning To FX Trading

The Australian Securities and Investments Commission (ASIC) has reported a growing interest in foreign exchange (forex) trading among Australian retail