The Economic and Financial Affairs Council meeting (ECOFIN) held on 17 May welcomes the decisive steps taken to strengthen bank balance sheets as part of a comprehensive approach to ensure financial stability based on a new, transparent and strengthened EU-wide stress-test exercise. The ECOFIN in this regard welcomes that some banks have already taken measures to reinforce their capital base ahead of the publication of the stress test results.

Any remaining pockets of vulnerability in the banking sector will be addressed in line with previous conclusions of the European Council. Member States will prepare, ahead of the publication of the stress test results, and as part of a coordinated strategy, specific and ambitious strategies for the restructuring of vulnerable institutions, which will privilege private sector solutions but also include a solid framework for the provision of government support in case of need, in line with State aid rules.

Depending on each institution and country, backstop mechanisms may cover a broad range of measures, including both private and public elements, such as e.g. external audits, additional reporting requirements, reinforced monitoring, plans for capital conservation, capital increases, risk mitigating actions, liability management exercises, restructuring, sale of assets, transfers of assets to asset management companies, splitting of core and non-core activities and, where appropriate, merging of institutions to more viable units, orderly resolution, with the aim to accelerate the strengthening of the banking sector while preserving financial stability. If the stress test reveal a capital need, private-sector solutions will be preferred. The use of public funds will be available only as a last resort.

Together with the new requirements implementing the Basel III agreement, and as laid out in the forthcoming fourth revision of the Capital Requirements Directive, this exercise should provide the right incentives for banks to restructure their operations, improve their risk management, strengthen their capital base and liquidity profiles, therefore contributing to improving financial stability in the medium to long run. The use of backstop mechanisms in the Member States will be monitored on a timely and regular basis at national and EU level to ensure timely and effective implementation of the remedies as part of the coordinated EU-wide approach.