The results of the European Central Bank’s (ECB) comprehensive assessment of European banks should “restore some confidence and stability” in markets, in spite of 25 banks failing the test.
The results of the ECB’s extensive asset quality review (AQR) and stress tests of the EU banking system found a €24.7bn shortfall in banks’ balance sheets.
However, experts suggested the results were not as bad as some expected - and the ECB’s extensive project should deliver on its aim of reassuring the world about Europe’s banking sector.
Guy Miller, chief market strategist at Zurich Insurance Group, said there had been “no significant surprise” in any of the results and said they had been “better than some had feared”.
Mr Miller said the key positive from the findings was that the cloud of uncertainty had been lifted from banks, who would now be able to “free up their loan books” and start lending again.
He said the second quarter lending survey from the ECB had shown growing demand for credit from companies and individuals and he expected the third-quarter survey, released tomorrow, to continue that trend.
Mr Miller said he expected both equity and investment grade credit markets to benefit from the results because “some uncertainty has been taken out of markets”.
Equity markets across Europe opened higher this morning but quickly gave up their gains to trade in the red by mid-morning.
But Geir Lode, head of global equities at Hermes said the ECB test results were “a positive for the markets”.
He said “An important number to note from this announcement is the €136bn of assets reclassified as non-performing. This should ease any concerns about more skeletons in bank closets.”
Mark Holman, chief executive of TwentyFour Asset Management, said the announcement “should go down well” in the markets and “spreads should tighten on bank debt”.
However, he warned that any upside in credit markets would be “capped” because of the likelihood that banks will start issuing more debt following the end of the ECB’s review.
He said it was likely that “we could see record issuance in November” and the increase in supply will prove a headwind to bond market returns.
