EU unveils rules to ensure level playing field in bank tests

Mon Oct 21, 2013 8:46am EDT
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By Huw Jones

LONDON (Reuters) - Europe's top banking regulator has set out rules to ensure EU banks cannot rely on national definitions to obscure the true state of their books in an upcoming assessment of whether they need more cash.

The last two rounds of the EU's "stress tests", which were widely criticized for not being tough enough, gave national authorities leeway to set key definitions such as what counted as a bad loan and which loans were subject to "forbearance".

This time around, with its credibility resting on the third attempt to convince investors banks have enough cash, top regulator the European Banking Authority (EBA) has prescribed newly-detailed rules to level the playing field.

The rules will be used by the European Central Bank (ECB) in its upcoming asset quality review (AQR) looking at whether the eurozone's top 130 banks such as Deutsche Bank (DBKGn.DE: Quote), Unicredit (CRDI.MI: Quote) and BNP Paribas (BNPP.PA: Quote) have properly faced up to the extent of their bad loans.

The 11 EU countries outside the eurozone must also carry out their own AQRs, which will also have to use the new rules.

The ECB will announce initial details of how its tests will be conducted at 0800 GMT on Wednesday.

"These recommendations promote consistency to the process and outcomes of the AQRs at the European level so that remaining doubts about the quality of assets across the EU may be alleviated," the watchdog said in a statement on Monday.

The bloc's financial services chief Michel Barnier said last week the results of the EU tests were not expected to be dramatic and that shortfalls of capital will most likely be plugged by tapping markets - rather than having to go cap in hand to taxpayers as during the 2007-09 financial crisis.   Continued...

The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. REUTERS/Kai Pfaffenbach