FFI’s Kauppi: Stress test proved that risk sharing should not be increased

The latest EU-wide stress test demonstrated improved resilience in the EU banking sector as a whole, but also showed significant variation between individual banks. According to the test results, the largest banks operating in Finland are resilient and financially sound. Some euro countries, however, should urgently continue their bank recovery and resolution measures. Piia-Noora Kauppi , Managing Director of the Federation Of Finnish Financial Services (FFI), says it would be wise to suspend all plans to increase risk sharing in the banking union, in light of the highly varying results.

The European Banking Authority (EBA) published the results of the EU-wide stress test on July 29th. The stress test involved 51 European banks. Finnish test participants included OP Cooperative and the Finnish subsidiaries of Nordea and Danske as part of their parent companies. The test assessed banks’ ability to meet capital adequacy requirements under different scenarios of economic development.

“The stress test proved that the major banks operating in Finland are healthy and resilient. The same goes for Nordic banks in general: their capital adequacy remained strong even in a scenario with economic conditions that were clearly more adverse than is actually forecasted. All in all, this is a great result. It should also dispel the fears expressed by some parties regarding the potential risks resulting from the Nordic connections of our banking sector”, says Piia-Noora Kauppi, Managing Director of the FFI.

Based on the stress test results, European banks are in better condition than a few years ago. They have augmented their capital base and cleaned up their balance sheets. Despite these measures, several countries’ banking sectors continue to struggle. Kauppi points out that thousands of smaller banks were left outside the scope of the stress test, and their health has not been consistently assessed yet.

“To protect the stability of the European economy, it is important for many countries to continue their bank recovery and resolution measures. The European banking system’s stability is in all of our best interests, and we must strive to maintain it with determination. All plans that would increase risk sharing among banks in the banking union should be put on hold. This applies especially to the plans to establish a European Deposit Insurance Scheme. The current health differences between banks would lead to unequal burden sharing if risk sharing were increased any further. Finnish banks who have taken good care of their business would suffer, and so would the customers of the banks”, Kauppi emphasises.

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Veli-Matti Mattila

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