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
The likely answer is that responsibility will fall back on to national backstops – precisely the scenario the euro zone pledged to avoid when EU leaders agreed to break the link between sovereign and banking debt in June 2012.
This is mainly because the euro zone has yet to establish a pan-European fund to deal with widespread capital shortfalls, despite the shared intent by member states to shift the burden of future bank bailouts away from taxpayers and onto the private sector.
Discussions on how to resolve troubled banks – the second main phase of banking union following the appointment of the ECB as a single supervisor – have not yet delivered results that will be in place in time for next year’s tests.
A number of inter-connected resolution concepts are under discussion. The banking resolution and recovery directive (BRRD), which has involved tense discussions between countries on which class of creditors are hit in the event of a bank wind-down or restructuring, may be signed off by countries by the end of this year but won’t be up and running until 2018.
The inter-connected concept of the Single Resolution Mechanism (SRM), a centralised body and fund which would decide when and how a bank is wound down and which would implement BRRD rules, is also some way off.
Even when established, it could take up to 10 years to build up sufficient funds (which will be paid by bank levies). Suggestions it could be funded in the meantime through a loan from the ESM (European Stability Mechanism) were dismissed by Draghi earlier this month.
The ESM itself – from which the Irish Government hopes to secure retroactive direct bank recapitalisation for Bank of Ireland and AIB – has a maximum of €60 billion available for direct bank recapitalisation, deemed to be insufficient for multi-country recapitalisation.
This leaves the problem at the door of national governments. The urgency of finding a solution was suggested by comments from Draghi in recent weeks, in which he highlighted the need to have backstops in place. ECB executive board member Yves Mersch even seemed to suggest the assessments could be delayed in the absence of such provisions.
“Backstops need to be in place before the assessment has begun. Put simply, if there are no backstops, there will be no assessment,” he said
Following Wednesday’s governing council meeting, Draghi made his strongest comment to date on the matter, indicating he was satisfied those national backstops would be in place. Pointing out that the last EU summit had included specific references to national backstops, he said he was “astonished” that doubts had been raised as to whether national backstops would be established.
While this appears to put the ball back in the national court, the use of a national backstop does not automatically suggest the State would be on the hook for the full cost of any fresh recapitalisations.