ECB’s Asmussen says national budgets may have to contribute if stress tests show shortfalls at banks
Reviews of euro zone banks to be conducted shortly
Executive board member of the European Central Bank, Jörg Asmussen, said private investment would be the first port of call if a bank needs more capital. Photograph: Reuters
National governments may be forced to contribute to future bank recapitalisations if next year’s European bank stress tests reveal shortfalls in the balance sheets of European banks, a board member of the European Central Bank said yesterday.
Speaking following a meeting of euro zone finance ministers in Vilnius yesterday, European Central Bank executive board member, Jörg Asmussen, said that while private investment would be the first port of call if a bank needs more capital, national budgets could also be forced to contribute if private market funding is not sufficient. The euro zone rescue fund, the ESM, could also be involved in individual financial programmes, he said.
The ECB has previously called for a “backstop” to be put in place to meet any capital shortfalls that may arise following the bank’s asset quality review test early next year. The ECB will conduct asset quality reviews of euro zone banks ahead of its assumption of supervisory responsibilities. This will be followed by stress tests by the European Banking Authority next autumn.
Euro group president Jeroen Dijsselbloem said that the euro group would discuss the question of backstops over the next few months, with detailed planning scheduled for November.
Yesterday, European finance ministers discussed plans for a single resolution mechanism (SRM), which would be responsible for the resolution of troubled banks through a common resolution fund. However, the SRM would only be deployed for the resolution of banks, once the EU’s banking union is set up, and would not function as a bank recapitalisation instrument.
Divisions persisted between member states yesterday on the level of centralisation that a single resolution authority would involve, with Germany and Finland arguing for greater involvement of national resolution authorities. This was despite the presentation by the European Commission and ECB of an EU legal opinion on the subject which found that the European Commission’s proposal for a centralised single resolution mechanism does not require treaty change, as suggested by Germany. Senior euro zone figures also said yesterday that the new resolution fund could be financed initially through a loan from the ESM, while the fund builds up finance through bank levies over time.
In relation to next year’s banking stress tests, Mr Asmussen said the ECB’s asset quality reviews would be “rigorous and robust”, as he conceded that the last two European wide bank stress tests had been inadequate. “This is now our third and maybe our last chance to do this [ . . .] The importance of this exercise can be hardly over-estimated.” He called for the swift implementation of the next stage of banking union.
Meanwhile, euro zone finance ministers signed off on a €1.5 billion loan package for Cyprus yesterday, its latest disbursement under the IMF-EU programme agreed in March. “The Cypriot authorities have taken decisive steps to stabilise the financial sector” and “meet the fiscal targets”, euro zone finance ministers said in a joint statement following the meeting. “Because the short-run economic outlook remains difficult and subject to considerable uncertainty, continued full and timely policy implementation remains essential.”
Euro zone finance ministers also received an update from the Slovenian finance minister on the country’s fiscal situation. Slovenia is currently undertaking stress tests on 10 banks, with the reviews expected to be completed by the end of November. Last week, the Slovenian government liquidated two of the country’s smallest banks. Speaking in Vilnius yesterday, Slovenian finance minister Uros Cufer said today his country has enough cash reserves to address problems in its banking sector.
Finance ministers will continue discussion on banking union today, as well as on a joint response to tax evasion and avoidance. It comes in the wake of confirmation that the European Commission has begun a preliminary inquiry into specific tax arrangements adopted by Ireland, the Netherlands and Luxembourg.