Brussels, 23/10/2013 (Agence Europe) - On Wednesday 23 October, the European Central Bank (ECB) published details of how it is planning to analyse the strength of 128 banks in the eurozone over the next twelve months in cooperation with national authorities and consultants Oliver Wyman with the aim of identifying any capital shortfalls before the ECB becomes the new eurozone bank supervisory body in November 2014.
Over dinner at the European Summit on Thursday (see separate article), ECB head Mario Draghi will unveil the methodology to be used for the bank assessments, which the ECB says will be the most extensive ever carried out given the sheer number of banks and also the size and geographical scale of the sample involved.
There is a triple aim - to boost transparency by improving the quality of the information available about bank balance sheets; - to identify and apply corrective measures if and when they prove necessary; - and to restore investor confidence in the strength of the European bank sector.
Backstops. The ECB says it is crucial for the 18 countries of the eurozone to set up safety nets at national and European levels before the results are published in order to be able to provide aid as a last resort to banks if private cash in the form of sale of assets and the money markets does not suffice to fill any funding gaps. This a controversial question that the member states are highly divided over (see EUROPE 10943) and is related to the ECB's recent warning of over-zealous application of the new state aid rules (see EUROPE 10947).
Formally endorsed by the Ecofin Council last week (see EUROPE 10942), the single bank supervision mechanism identifies banks in the eurozone that are of “systemic importance” and thus to be supervised directly by the ECB using the following criteria: - total assets of over €30 billion; - ratio of assets to GDP of country of origin of over 20% unless the total assets are below €5 billion in value; - and the biggest banks in each country. The ECB decided to apply a 10% margin of error to the criteria when drawing up the list of banks in question. The 128 banks are 124 bank headquarters and 4 subsidiaries, broken down as follows: 24 in Germany, 16 in Spain, 15 in Italy, 13 in France, 7 in the Netherlands, 6 in Austria, Belgium and Luxembourg, 5 in Ireland, 4 in Greece, Cyprus and Portugal and 3 in Estonia, Finland, Latvia, Slovenia, Slovakia and Malta.
The ECB will examine the qualitative and quantitative risks on the balance sheet, including liquidity risk due to leverage and financing. It will also assess the quality of bank assets as at 31 December 2013. The vast and detailed assessments will focus on banks' ability to have a solvency ratio of 8% (4.5% in core tier 1 assets and 2.5% as a capital buffer and 1% as a further buffer given the systemic importance of the banks in question). The bank balance sheet assessment will look at the quality of non-performing loans (those with payments more than 90 days late), restructured loans and exposure to sovereign debt. Based on an analysis of the risk and the assessment of the bank balance sheets, stress tests piloted by the European Banking Authority (EBA) will then be carried out to test the banks' ability to survive a hypothetical crisis scenario.
Welcoming the unveiling of the methodology, the European Banking Federation said that as many banks as possible should be placed directly under ECB supervision. (MB/transl.fl)