ECB: eurozone banks are mostly ready after stress test

Most big eurozone banks are well braced for possible future interest rate rises, the European Central Bank said Monday after running dozens of them through a stress test. On a scale running from a top mark of 1 to the lowest of 4, 60 out of 111 banks scored 1 or 2 in the test, the ECB said.

For the first time, the stress test examined how sudden changes in interest rates will affect banks’ income and the value of their assets. Of the other banks, 34 received a mark of 3 and 17 scored a 4.

Results of the test, which started in February, will be incorporated into the ECB's broader review of banks, which determines how much capital each lender needs to hold.

The central bank said that in a hypothetical interest rate shock involving an increase of 2 percentage points, net interest income would increase by 4.1 per cent this year and 10.5 per cent next. The stress test imagined a sudden overnight increase. That is a highly unlikely scenario, but one which helps show whether bank finances are robust. The ECB concluded that "interest rate risk is well managed by most European banks."

Currently, the bank is contemplating phasing out its stimulus program over the course of next year. The bank has been buying 60 billion euros ($70 billion) of bonds a month in the hope of keeping market interest rates low, thereby helping to stimulate the economy and get inflation up to its goal of just under 2 per cent. The bank has said it does not plan to raise its benchmark interest rate from the current zero until well after the bond purchases end, which would mean not until 2019 at the earliest.