FRANKFURT: The European Central Bank tomorrow releases the results of an unprecedented health check of eurozone banks before assuming the role of the region’s banking supervisor next month.
The ECB takes on its new watchdog role on November 4 and it hopes that a “comprehensive assessment” — made up of a so-called asset quality review (AQR) and a “stress test” — will uncover any potentially nasty surprises beforehand.
After all, previous banking stress tests in Europe, the latest in 2011, failed to expose serious problems in a number of key financial institutions. In fact, some were given a clean bill of health only to need rescuing just months later.
So this time round there is a great deal at stake, not least the ECB’s reputation, and confidence in the eurozone banking sector as a whole.
The ECB will publish the results of the audit — which will put under the microscope the balance sheets of some 130 banks accounting for 82 percent of total banking assets in 19 countries (the eurozone plus Lithuania) — at noon (11:00 GMT).
At the same time in London, the European Banking Authority (EBA) will publish the results of its own stress test for the wider EU. Those tests run the banks through two different economic scenarios to see if their balance sheets are healthy enough to withstand further economic shocks.
Under a baseline scenario, a bank’s core capital ratio, a measurement of financial strength, must not fall below eight percent. In the adverse scenario, it must not fall below 5.5 percent.
Analysts are confident that because banks have been taking action for months now to plug any holes in their balance sheets, there will not be any nasty surprises.
“We expect that the majority of banks will pass the assessment,” said credit rating agency Fitch.
And “many of the failures are likely to be technical in the sense that capital shortfalls have either already been addressed in 2014 or capital is easily sourced from parents or elsewhere in a banking group,” the agency wrote in a special report.
Jessica Hinds at Capital Economics said “there are reasons to think that the new stress tests will have more bite”.
“First, they actually are comprehensive. And second, the treatment of banks’ sovereign bond holdings will be more rigorous,” she said.
The assessment is also based on more realistic macroeconomic projections than previous stress tests, the expert continued.
If a bank fails either the baseline or the adverse scenario, they will have two weeks to tell the ECB how they plan to raise the additional capital.
Those that fail the baseline scenario must recapitalise within six months, while those that fall through the adverse scenario will have nine months to do so.
The banks were already given a preliminary indication of their outcome on Thursday.
And an ensuing spate of unconfirmed press reports suggested that Austria’s Erste Bank, Portuguese bank Millennium BCP, Banca Monte dei Paschi di Siena of Italy and Dexia in Belgium could be among those that fail.
A German bank, HSH Nordbank, which had previously been as a possible candidate for failure, may have passed after all, media reports suggested.
AFP
