19 September 2013

Bloomberg: ECB policy-makers say stress tests risk market confusion

As the ECB prepares to take over supervision of all euro area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch last month, the bank will start with a risk review before analysing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority (EBA).

Now central bankers are wrestling with how to move through the exercise without releasing conflicting numbers at different times, particularly for banks that aren’t in good health. ECB Executive Board member Peter Praet and Governing Council member Ewald Nowotny said this week that the two organisations must avoid giving different estimates of how much extra capital banks will need to raise.

"Probably the stress test has to be integrated in the balance-sheet assessment, because you don’t want to come with one figure per bank, with the possibility of a recap, and then come later on with the stress test", Praet said in London.

Reuters quoted Praet as saying that the ECB would provide what are the basic parameters of the exercise so that the banks can prepare for it. The exercise would take some time. What the sector really needed was to have some information on the ingredients of this exercise. "The asset quality review followed by the stress test, we will communicate by mid-October AQR the broad lines of the exercise and the governance of the exercise. That is key to providing information, the response to the problem of asymmetry of information", Praet said.

European lenders have undergone two stress tests since 2010, with eight banks failing the last round conducted by the EBA in 2011 with a combined capital shortfall of €2.5 billion. ECB Executive Board member Jörg Asmussen said this month that the upcoming tests will be the final opportunity to restore confidence in the region’s financial system.

To avoid conflicts, the London-based EBA in May delayed this year’s round of stress tests until 2014, to make room for the ECB’s asset quality reviews of banks joining the euro area supervision regime. Investors now are looking to the assessments to uncover hidden problems so they can be properly fixed.

"What we have to prevent in any case is that we now have both results on capital requirements from the asset-quality review and results of a stress test", Nowotny said in Vienna. "Instead of reassurance, that would lead to complete incomprehension. Personally I’m not quite sure whether a stress test in addition to an asset-quality review really adds great value and can contribute to an increased stabilisation of the markets."

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Further reporting © Reuters

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