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EU banking watchdog proposes `less prescriptive' stress test

By Huw Jones

By Huw Jones

LONDON, Jan 22 (Reuters) - Stress testing of banks in the European Union to check their ability to withstand market shocks without taxpayer help should be eased to cut bank costs, the EU's banking regulator proposed on Wednesday.

The European Banking Authority (EBA) proposed a new framework that would allow banks to publish their own results of the stress test alongside the EBA's. Only one set of results are published now.

"The framework we are proposing today aims at making the EU-wide stress test more informative, flexible, and cost-effective," EBA Chair Jose Manuel Campa said in a statement.

Stress testing became a regular exercise in the United States and Europe after the global financial crisis a decade ago when taxpayers had to bail out under-capitalised lenders.

The EU conducted its first pan-European test in 2011 to see how well banks could shocks. The outcome of the tests puts pressure on banks to top up capital quickly, where needed.

But with banks now adequately capitalised in general, the test has become less frequent - every two years instead of annually - and used by supervisors to look beyond basic capital levels to more specific risks like poor profitability.

EBA said it was time to take stock, and in a discussion paper for public consultation, it proposed two parts to the same test. In the first, the EBA would test the need for any additional capital at specific banks. The second would be conducted by banks themselves.

Both would use the same stress scenarios as a basis for the test, with two sets of results, one from supervisors, the other from banks.

"The methodology from the bank leg would be less prescriptive than today and give banks more discretion in calculating their projections," EBA said.

"The two legs of the exercise would lead to two sets of outcomes: the supervisory outcome would be directly linked to the bank's P2G and would provide limited disclosure, while the bank leg would facilitate market discipline through its broader transparency with granular disclosure."

Banks would have to explain and disclose why their results differed from those of supervisors.

The next EU stress test is due this year and will be conducted under the existing framework, with results published in July.

Analysts have criticised the existing EU test as being more lenient that the test of U.S. banks conducted by the Federal Reserve. Any move to ease the EU's exercise could face scepticism from markets.

(Reporting by Huw Jones, editing by Larry King)