National backstops expected to be in place for European banking stress tests - Draghi

National backstops are expected to be in place to deal with capital holes that might be uncovered by next year's European bank stress tests, the head of the European Central Bank indicated yesterday.

Mario Draghi’s comments underline expectations it will fall to states to decide how to deal with any losses that arise when banks’ balance sheets are investigated next year, despite last year’s pledge to sever the link between sovereign and banking debt.

Speaking in Paris after the ECB’s monthly rate-setting meeting, at which interest rates were left at a record low of 0.5 per cent, Mr Draghi noted that an explicit reference to national backstops had been included in the conclusions to the last EU summit.

'Astonished' by doubts
He said he was "astonished" that doubts had been expressed about whether national backstops will be in place by the time the ECB assumes supervisory control of the banks next year.

He added that EU commissioner Olli Rehn had reiterated that any capital injections by states would be regarded as a "once-off" measure and would not be counted by the European Commission when it calculates countries' excessive deficit targets. However, capital injection by states into the banking system are likely to significantly add to the debt pile of individual countries.

Mr Draghi said he did not expect “major disasters” from the tests, but added it was “quite important that full light be shed and full transparency be there”.

By the end of this month, the ECB will unveil its plans on how it plans to approach asset-quality reviews of 130 euro zone banks. The reviews will be followed by separate European Banking Authority stress tests later in the year.

Bailout exit
The bank announced this week that Oliver Wyman, the consultancy firm that gave Anglo Irish Bank a clean bill of health in 2006, will aid with the process, though national supervisors will have a key role. The Central Bank of Ireland is undertaking its own balance sheet assessment in preparation for the exit from the bailout, though these will not be published separately and are likely to feed into the European tests.

After the rate-setting meeting in Paris, Mr Draghi reiterated that the ECB would be ready to launch another long-term refinancing operation for Europe’s financial system.