— This is the script of CNBC's news report for China's CCTV on October 27, Monday.
25 out of the Eurozone's top 130 banks failed the ECB's landmark stress tests at the end of 2013, with a total capital shortfall of 25 bn euros.
They are widely touted as the the most rigourous tests yet by the ECB.
But some are sayimg the 10 bn euro capital requirement is still too low.
In fact, a survey by Goldman Sachs found investors believed the ECB should ask lenders to raise 51 bn euros for the tests to be credible.
CNBC's Annette Weisbach spoke to ECB's Vice President and asked him about that concern.
[Vitor Constancio, Vice President, ECB] As a result of the AQR and the stress test, the capital of the banks would come down by 263 billion. And in spite of that, most of the banks stayed above 5.5. So, I think the severity of the exercise, and the high starting point for the bank, explain, of course the results, which are fully credible, and I just end with this, because this exercise was not just an official (unclear) exercise. We had involved in the exercise almost 5,000 experts from private firms conducting the exercise on the field. So I think that this exercise can only be considered as a very credible one.
[Annette Weisbach, CNBC] Do you think that exercise now, if the market will think it's credible, it's also a starting point that the valuation of banks is getting better here in Europe?
[Vitor Constancio, Vice President, ECB] Well, it's already happening, because if you take the development of the stock prices of European banks since the beginning of 2013 until now, they have increased more than the average of the market. And in 2013 alone, they have increased by 41 percent. So, there was already in the markets already the recognition that the low profitability that the banks had in 2012 and 2013 was indeed very much affected by cyclical factors, in particular the comprehensive assessment that was coming, and was leading them to increase provisions, so that after the exercise, profitability will tend to increase, and the market valuations and the development of stock prices was already anticipating that. And it will continue, to fully answer your question.
[Annette Weisbach, CNBC] Let us look at one of the profitability potential sources of banks, that is, lending. Do you think that this will really be a catalyst, or the stress test release will be a catalyst to lending in Europe?
[Vitor Constancio, Vice President, ECB] Well, as I said, and I was very precise in what I said, this exercise will reduce any credit supply restrictions that the banks may have. The banks were being cautious before this exercise. We always said this exercise would have a pro-cyclical negative impact on their behaviour. It was normal. Now we just ended, so this will reduce any sort of restrictions coming from their decisions, but what is in the end lacking is sufficient aggregated demand in Europe. And that is what we are trying to correct with our monetary policy, and other policies that we expect European governments will take indeed to correct this situation of very low, weak demand in the euro area.
I'm Qian Chen, reporting from CNBC's Asian headquarters.