The European Central Bank (ECB) will on Sunday unveil the results of its year-long hunt through the books of 130 biggest European banks, a key part of the Eurozone’s effort to recover from its debt and ongoing economic crunch.
The review mainly aims to weed out those banks that are hiding their financial woes which have obstructed them from lending to businesses at affordable rates. Both small and big companies require the loans to carry out investment and hiring in the European economy that has not grew at all in the second quarter and the jobless rate remained at 11.5 percent.
According to the officials, those banks that have failed in the review could be asked to raise money, reform or be sold off. Whatever be the case, this could lead to turmoil in the few markets in the short term as banks rush in order to find cash from governments or investors.
However, there are strong hopes that this will create stronger banks in the longer term.
In the Eurozone, the businesses are highly dependent on bank loans in comparison to the US, where the firms generally raise funds via the bond markets.
For the test, the investigators examined whether the holdings of the banks are worth what they actually claim.
Following the review, the banks may maintain an eight percent capital ratio, which measures the amount of capital a bank possess against the perilous investments that could result into losses. Higher the ratio, thicker is the financial cushion and stronger is the bank.
Moreover, not every bank that fails to shine during the review requires to raise new money. This is because some banks will have raised money since the 2013-end, the time when the European Central Bank started looking at the figures.
The banks are also put through a stress test, where they are supposed to maintain a capital ratio of at least 5.5 percent.