Banks must face separate exams on liquidity and capital because they can’t be measured in the same stress test, Andrea Enria told lawmakers at a hearing reviewing his appointment as chairman of the European Banking Authority.
Regulators lack an “internationally agreed way” of combining the two, Enria said at a hearing at the European Parliament in Brussels today. Future tests on banks’ ability to survive in a crisis should also be tougher and more consistent to ensure results are comparable between lenders in different countries, he said.
Last year’s European Union stress tests were criticized for not being stringent enough because lenders in the 27-nation region were shown by regulators to need only 3.5 billion euros ($4.8 billion) of new capital, about a 10th of the lowest analyst estimate. The European Commission is seeking to include liquidity tests in the wake of Ireland’s financial turmoil.
“The stress tests must be more severe,” Enria said. “We need cross-checks between supervisors to make sure the results are reliable.” Lawmakers at the EU Parliament must approve his Enria’s appointment, as well as appointees to run two other new EU financial authorities.
Enria also said Europe should implement capital rules proposed by the Basel Committee on Banking Supervision without “exemptions.”
Enria, head of the Bank of Italy’s regulatory division, was selected as chairman and Thomas Huertas, an executive at the U.K.’s Financial Services Authority, was chosen as vice-chairman of the EBA. The regulator was set up on Jan. 1 to take over from the Committee of European Banking Supervisors.
Enria’s views on implementing the Basel measures uniformly across Europe may set up a clash with Michel Barnier, the EU’s financial services chief, who said “there are possible areas of maneuver,” in an interview on Jan. 20.
The Basel rules won’t be enacted in the EU until governments in the region jointly approve implementing legislation drawn up by the Brussels-based commission.
Regulators should be able to “break up activities of the banks for instance to move assets and liabilities” so that these lenders’ essential operations can continue in a crisis, Enria said.
Such breaking up could “ensure continuity” he said, and protect consumers from “major damage.” The commission proposed giving regulators power to block new products and change banks’ “legal or operational structures” earlier this month.
An exodus of deposits from Irish lenders caused a funding shortfall which led European governments and the International Monetary Fund to agree on an 85 billion-euro aid package for the country.
“Liquidity is very difficult,” Enria said. “We cannot embody liquidity and credit risk into the same stress-test exercise.”
At today’s meeting, Parliament’s economic and monetary affairs committee also vetted Gabriel Bernardino, the designated chairman of the European Insurance and Occupational Pensions Authority, and Steven Maijoor, the proposed head of the European Securities and Markets Authority.
The committee said it postponed a decision on whether to recommend endorsing the trio’s candidature until it gets reassurances from governments that the agencies will have “appropriate” budgets and independence.