Europe’s banks nervously await shape of ECB stress tests
Most significant question surrounding the stress tests is who will pay for any capital holes that emerge
ECB HQ in Frankfurt: there is concern in EU circles that next year’s bank stress tests could threaten the EU’s very early-stage economic recovery and the relative market stability that has taken hold since last year’s pledge by the ECB to “do whatever it takes” to preserve the euro
Euro zone banks could be forgiven for feeling a little bit nervous these days, as they await their fate at the hands of the ultimate big Daddy, the European Central Bank. Coming weeks should reveal the shape of the ECB’s plans to review banks’ balance sheets in advance of the Frankfurt-based institution assuming direct supervision of 130 of the bloc’s biggest financial institutions.
The so-called “asset quality reviews”, which will be followed by stress tests undertaken by the London-based European Banking Authority (EBA), represent a milestone in Europe’s progress towards a banking union. They also pose a potential threat to the relative calm that has descended on the euro zone over the last year.
While ECB president Mario Draghi said on Wednesday he was not expecting any “major disasters” from the tests, privately there is concern in EU circles that next year’s stress tests could threaten the very early-stage economic recovery and relative market stability that has taken hold since last year’s pledge by the ECB to “do whatever it takes” to preserve the euro.
A lot rests on the quality, scope and parameters of the assessments themselves.
Draghi has said consistently that the tests must be tough and credible, and the ECB is unlikely to want to put its own reputation on the line with a token exercise, particularly as it prepares to assume its role as a supervisory authority for the first time.
The spectre of the European Banking Authority’s previous stress tests – which gave banks like Anglo Irish Bank a clean bill of health – also looms large. The appointment of Oliver Wyman, which signed off on Anglo in 2006, as consultants to the project has already raised alarm bells.
On the other hand, there is fear that excessively cautious tests could lead to further destabilisation.
Much as Nama forced banks to crystallise massive write-downs when it bought the troubled commercial loans from Irish banks, the impact of a stringent set of tests on the euro zone economy could prove too much for the financial system, and could be resisted by some member states. Details of the exercise, including how much power will be given to national authorities and how asset quality will be defined, will become clearer by the end of the month.
But the most significant question surrounding the stress tests is who will pay for any capital holes that emerge. Outgoing chief executive of Dutch banking giant ING Jan Hommen expressed the underlying concerns two weeks ago. “The question for me is who is going to provide that capital . . . Because I don’t think there is a safety net built yet that makes sure that if a bank needs more capital, it is there.”