Frankfurt: Eurozone banks that are told they have holes in their balance sheets will have just two weeks this autumn to come up with plans to plug the gap, according to new information from the European Central Bank.
The Frankfurt-based regulator on Thursday published an update of its plans as it prepares to carry out stress tests in the coming weeks on 128 of the largest banks across the Eurozone before it takes over supervision of the lenders in November.
Banks will be given the results of the stress tests in October along with feedback on a so-called asset quality review that has seen the ECB seek to identify inconsistencies in the way lenders measure their riskiest assets.
Lenders’ balance sheets will be stress tested under both a baseline and an adverse scenario. Banks will have six months from October to cover shortfalls in the baseline case and nine months in the adverse case.
The ECB has stressed the need to make its probe more rigorous than previous European banking stress tests that failed to identify serious problems with some lenders. As a result, the outcome of the AQR for each bank will be used as a starting point for the balance sheet strength of the bank during the stress test, which the authority called a “key strength” of the exercise.
The results will only be given to the banks 48 hours before they are published, according to bankers briefed privately by the ECB. However, in September and October, banks will be given preliminary results of how they have fared in the tests.
Bankers have said they have been given very little information about how the stress tests will be conducted. One said that was a good thing: “The ECB needs to be seen to do a credible stress test, so the less we know about it, the better,” said one.
The stress tests have already prompted a number of the Eurozone’s largest lenders to raise capital in advance of the results. Others have held back dividends or set aside money to have a cushion against any orders to raise capital this autumn.
Under the new rules announced on Thursday, banks will also have the option of retaining earnings from 2014 to plug any holes in their balance sheet arising solely from the AQR, though not from the stress tests. The ECB has cautioned that the first port of call to raise capital should be through private sources. But it has warned that public recapitalisations could be required in certain, more serious situations.
