Draghi Goes Face-to-Face With Bank Chiefs on Asset Health

Bank executives traveled to Frankfurt for a first meeting with European Central Bank President Mario Draghi on the ECB’s review of lenders’ assets.

Chief executive officers from banks from five countries -- Germany, Belgium, Cyprus, Malta and Luxembourg -- met today with Draghi and other board members at ECB headquarters, a spokeswoman for the central bank said by telephone. The list included Europe’s largest investment bank by revenue, Deutsche Bank AG, and lenders such as Malta’s Bank of Valletta Plc.

The ECB began a three-stage probe this month into the balance sheets of lenders across the 17-nation euro area, as a precursor to its assumption of financial supervision duties in November next year. UniCredit SpA (UCG) CEO Federico Ghizzoni, who may join a group convening in Frankfurt on Nov. 25, said yesterday his institution is cutting expenses and setting aside more provisions as it prepares for the review.

“The banks don’t really know more than we do,” said Ronny Rehn, a banking analyst at Keefe Bruyette & Woods in London. “I guess they want to get a feeling about the process. Maybe want to get the informal version of what needs to happen to make this credible, how much pain will need to be taken.”

Three Stages

Executives also met Vice-President Vitor Constancio and Executive Board member Yves Mersch, both of whom are responsible for setting up the ECB’s bank supervisor, the spokeswoman said. Mersch was scheduled to brief officials on preparations for the oversight duties, while Constancio was due to give a presentation on the asset review.

“Draghi probably will tell the banks, ‘Look, don’t fuff around, be honest and maybe a bit more,’” Rehn said. “He’ll probably also tell them, ‘If there is an issue, go out and fix it, otherwise I will.’ That’s what I’d do if I was Draghi.”

The ECB’s three-stage process is called the Comprehensive Assessment, beginning with an operation to identify portfolios requiring deeper scrutiny, followed by an examination known as the Asset Quality Review. Following those are stress tests simulating the effect of a range of adverse scenarios.

Ignazio Angeloni, the ECB’s director general for financial stability, will also meet bankers; representatives from each country’s national regulation authority will be present.

Further group meetings are planned for Nov. 18 and Nov. 25. The Nov. 18 round will include bankers from Estonia, Spain, Finland, France, Greece and Ireland. Executives from banks in Italy, Latvia, the Netherlands, Portugal, Slovenia, Slovakia and Austria will travel to the ECB on Nov. 25.

Most Leveraged

Some of the executives visiting the ECB today represent the banks among the most leveraged in Europe. The ECB singled out German, Belgian and Cypriot lenders in a report on Nov. 4 and said they need to make progress in increasing their equity as a share of assets. ECB officials have also said they’ll focus on asset areas known to contain higher levels of non-performing loans when selecting portfolios such as shipping loans and commercial real estate.

The results of the ECB’s review and stress tests -- as well as the possibility that information will leak before the end of the process -- could affect financial stability, the head of Germany’s main banking association said in Frankfurt on Oct. 30.

“This is a very complex project that comes with significant risks,” Michael Kemmer, general manager of the Association of German Banks said. The information that the ECB has provided until now is “relatively vague and undetailed.”

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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