ECB vows tough tests for eurozone banks
Print Edition
The European Central Bank promised yesterday to put top eurozone banks through rigorous tests next year, staking its credibility on a review that aims to build confidence in the sector.
The ECB wants to unearth any risks hidden in balance sheets before supervision comes under its roof as part of a banking union designed to avoid a repeat of the euro debt crisis, which was exacerbated by massive bad property loans in countries such as Ireland and Spain.
However, some analysts say that if the review is too strict and reveals unexpectedly large problems at some banks, it could backfire by undermining the very confidence it aims to bolster.
Setting out its plans to scrutinize 128 top eurozone lenders, the ECB said it would use tougher new measures set out by Europe’s regulator — the European Banking Authority — in the asset quality review it will conduct next year.
“A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85 percent of the euro-area banking system, is an important step forward for Europe and for the future of the euro-area economy,” ECB President Mario Draghi said.
“We expect that this assessment will strengthen private sector confidence in the soundness of euro-area banks and in the quality of their balance sheets,” he said.
The ECB said it would conclude its assessment in October 2014 before assuming its supervisory role in November, although some policymakers have suggested that timing could slip.
If capital shortfalls are identified, banks will be required to make up for them, the ECB said. Draghi has said a “public backstop” must also be available.
A provisional list of banks to be reviewed includes 24 German lenders, 16 in Spain, 15 in Italy, 13 in France, seven in the Netherlands, five in Ireland and four each in Greece, Cyprus and Portugal.
“The scope of the Comprehensive Assessment is more extensive than we expected,” analysts at Citi said.
The Bundesbank and financial watchdog Bafin, which in Germany share banking supervision, said the country’s banks were “already intensively preparing for the comprehensive assessment.”
Detailing the measures in its review, the ECB said it would use the EBA’s definition which classifies bank loans that are more than 90 days overdue as non-performing.
It will ask banks in its balance sheet review for an 8 percent capital buffer. That could have been higher but may still prove a challenge to some banks as they bid to become crisis-proof.
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