“The unexpected belly flops in Federal Reserve tests of some banks on Wednesday will cast a fresh cloud of uncertainty over the sector as lenders gird themselves for similar exercises in Europe later this year.
“Analysts on Thursday warned that regular stress tests were becoming a significant hurdle to banks’ freedom of manoeuvre as supervisors wield broad discretion in their assessments of management plans.
“James Chappell, an analyst at Berenberg in London, predicted that the European Central Bank, which is conducting its own health checks this year, would feel under pressure to fail a large EU lender in its own “comprehensive assessment” as it seeks to establish its credibility as a new supervisor.
“He said: “There is a big message for the European banks here. How has the Fed made their stress test credible? They have failed a big bank – Citi. The ECB will have to be willing to do the same if the market is to believe it is credible too.”
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