Barclays Share News (BARC)

On Monday the European Banking Authority (EBA) released its methodology on the macroeconomic scenarios to be used in the toughest stress tests for European Union (EU) banks to date, noting that the adverse scenario will combine a slump in home prices, a surge in unemployment levels and a downward spiral in economic growth. The EU-wide stress tests cover 124 banks and at least 50% of each national banking sector. They will be run hand-in-hand with national supervisors and the European Central Bank (ECB). The tests, which include an asset quality review (AQR), is scheduled to begin in May and finish towards the end of October. According to the methodology published on Tuesday, the adverse scenario assumes a 21.2% drop in house prices and a 19.2% retreat in equities over a three year period. Furthermore, the test will analyze the implications of a 7% drop in economic growth by 2016 together with a jump in unemployment to 13%. More specifically, the EBA explained that this adverse scenario "leads overall to a cumulative deviation of EU GDP from its baseline level by -2.2% in 2014, by -5.6% in 2015, and -7.0% in 2016. The EU unemployment is higher than its baseline level, by 0.6 percentage points in 2014, by 1.9 percentage points in 2015 and by 2.9 percentage points in 2016".EBA Chairman Andrea Enria stated that this methodology "will ensure a robust and effective tool for supervisors to address remaining vulnerabilities in the EU banking sector".These stress tests are meant raise investor confidence about the state of the EU financial sector and come after the prior 2011 exams that failed to evaluate risks adequately, thus failing to anticipate and prevent the bank failures which materialised just one year afterwards. In that regard, Enria said that "the exercise's full transparency will be key to its credibility: it will show how efforts recently undertaken by EU banks are already bearing fruit and it will provide a common framework for the next steps to be taken by supervisors and banks".At 11:12, Banks is the second best performing sector on the DJ Stoxx 600 rising by 1.35% and trailing only the 1.82% rise in Technology.JM