The 24 European banks that failed the ECB stress test must recover €24.6bn in capital and, in the process, face increased exposure to civil, criminal and regulatory action


Banks that have failed the European Banking Authority EU-wide stress test, the results of which were published last month, are likely to face increased liability risks, warned Marsh managing director UK Siobhan O’Brien.

The aim of the stress test is to assess the resilience of EU banks to adverse economic developments in order to understand remaining vulnerabilities, complete the repair of the EU banking sector and increase confidence.

Of the 123 banks that were assessed, 24 failed the test and a capital shortfall of €24.6bn was identified.

Failed banks are now required to submit capital plans to the European Central Bank (ECB) detailing how they will recover their capital shortfalls.

O’Brien warned that if these plans are misleading, the banks could face court action: “If the banks go into the equity market, they can either make debt or equity offerings and part of that process means they must present detailed reports regarding the financial health of the company and put out a prospectus to potential investors.

“If the reports are inaccurate or misleading, the banks and the directors and officers will find themselves exposed to civil, criminal and regulatory action,” she added.

Furthermore, the results of the stress test could encourage greater inspection from stakeholders, according to MetricStream vice-president of strategic markets Piyush Pant:  “These findings will no doubt lead to additional regulatory pressures and increased stakeholder scrutiny, including heightened expectations around the banks’ overall corporate governance and their ability to manage the unprecedented volume, variety and velocity of risk data.”

The ECB found that 12 of the 24 banks that failed had already taken remedial action regarding their capital shortfalls and O’Brien said that, about 12 months ago, the banking sector began to show greater interest in purchasing D&O policies in anticipation of higher liability risks.

She added: “When looking at the overall risk profile of a bank, one of the most important parts of their risk profile is their financial stability and risk management.

“Stress tests such as this help regulators and stakeholders to better understand their financial stability and their internal risk management capabilities.”