What's going on?
The results of the biennial stress test on European banks are in – and most of the big players performed pretty well.
What does this mean?
The European Banking Authority carries out regular stress testing to make sure that banks are robust enough to survive periods of economic turmoil. Although all 48 European banks tested “passed”, the UK’s Barclays and Lloyds scored surprisingly low marks, having made higher-risk loans in recent months in an attempt to boost profits.
Indeed, UK banks faced a disproportionately tough time in some test scenarios – like the UK Brexiting the European Union without a deal. Italian banks, meanwhile, were expected to be bottom of the pile, with the country’s economic growth at a standstill – but they performed a-okay.
Why should I care?
For markets: Americans have more fun.
European banks are lagging behind their US counterparts in several areas – thanks in part to tougher regulation and slower economic growth. American banks are making more money overall, with the results of the stress test highlighting European banks’ comparatively lackluster earnings. That’s no surprise for investors: shares of European banks are down more than 20% this year on average.
The bigger picture: Bank backers probably won’t go hungry.
The results of the stress test have an impact on banks’ abilities to return profit to their shareholders. Banks have to have sufficient reserves to weather a storm – and if they don’t, paying out cash to shareholders (by way of dividends or share buybacks à la Buffett) is a no-no. As all the European banks passed, shareholders should still be able to get their pockets lined – though probably not as thickly as investors in US banks. In the last stress test Stateside, $200 billion of planned shareholder payouts were effectively signed off by the US Federal Reserve.