The upcoming stress tests for European banks could push banks to be more open about the lurking risk of misconduct-related costs, says Fitch Ratings in a report.
Although banks already publicly disclose their contingent liabilities and any ongoing litigation, “In many cases markets have been surprised by the heavy fines imposed for mis-selling of financial products, violation of rules and manipulation of markets,” the Fitch report says.
The draft stress test methodology for 2016, “may force banks to think more carefully about their exposure to conduct risk,” the Fitch report adds.
The report notes that European banking regulators are asking banks to project losses that could result from misconduct through to the end of 2018. “By requiring banks to project and itemize conduct risk losses, this might help market participants estimate how much additional capital banks might need to cover such risks,” the Fitch report says.
In addition to this pressure for more disclosure about conduct risk, that the new stress testing procedure also aims to capture the impact of foreign-currency lending risk on solvency, the Fitch report says, and it will introduce new elements to the net interest income stress.
“Banks will have to incorporate risks related to a sudden change in the general ‘risk-free’ yield curves,” says the Fitch report. “This appears prudent in light of the impending US Fed rate decisions.”
Fifty-three European banks will participate in the 2016 stress tests, representing 70% of EU banking sector assets, it notes.