ECB to take tough stance in health check on banks

Tue Mar 11, 2014 2:02pm EDT
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By Eva Taylor

FRANKFURT (Reuters) - The European Central Bank (ECB) will press euro zone banks to revalue their assets and take a more realistic view on likely losses when it probes their balance sheets in the coming months, signaling a new, more aggressive era of banking supervision.

Publishing guidelines on Tuesday for its forthcoming asset quality review (AQR), the ECB said it would trawl through trillions of euros of assets at 128 leading banks between now and August, aiming to ferret out any problems before it takes over as the euro zone's banking watchdog in November.

The exercise is part of a bigger plan to harmonize the way banks are supervised and if necessary wound down, aiming to restore the sector's stability and avert a repeat of the debt crisis which cost trillions in taxpayer bailouts.

While preparations for coordinated supervision are already in full swing, European ministers were still trying to agree on how to build a safety net for failing banks on Tuesday in Brussels, redoubling efforts to avoid an embarrassing delay to the euro zone's centerpiece crisis reform.

Sabine Lautenschlaeger, vice chair of the banking watchdog and a member of the ECB's executive board, told the Wall Street Journal she expected some banks would need to improve their capital situation as a result of the tests, either by raising funds or selling assets, without giving a specific number. "It's the last chance to clean up," she was quoted as saying.

The asset quality review will be followed by separate and wider "stress tests" of Europe's banks, to see how they would fare under certain shock scenarios. All results will be released in October.

Estimates of banks' capital shortfall range from 280 billion euros ($390 billion) to as much as 770 billion euros ($1 trillion).

Previous stress tests of leading European banks failed to completely root out problems in the sector and the scope of the current review that combines backward looking checks and forward looking stress scenarios is unprecedented.   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